Buy Hindustan Zinc: Other income and lower tax boost profits ::Centrum

Hindustan Zinc

Other income and lower tax boost profits
Hindustan Zinc’s (HZL) Q1FY13 PAT was boosted by lower tax rate of 13% and higher
other income of Rs5.7bn (up by ~62% YoY). EBITDA stood at ~Rs14.3bn (against our
expectation of Rs14.6bn) with margin at 52.7%, lower by 90bps QoQ as mine output
was lower sequentially and LME realizations remained depressed. HZL benefitted from
Rs1.2bn MTM gain in other income and various tax optimization schemes helped lower
the tax rate to 13%. Company maintained its guidance on increased mine output in
H2FY13E, volume growth in lead and silver divisions and hinted at possible
announcement of new refined capacities in future based on successful mining
expansions and related feasibility studies. We revise our FY14E estimates on account of
higher rupee realizations, higher other income and lower tax rate. Maintain Buy.
Lead and silver volumes increase as expected: Lead and silver sales remained strong
and went up YoY by ~97% and ~76% respectively as both the lead smelter and silver
refinery continued to stabilise and mine production and silver grade from SK mine
improved. Zinc volumes remained subdued with lower zinc mine output and stood at
1.61 lakh tonne, lower by ~16% YoY.
Margin drops: EBITDA dropped by ~10% QoQ to Rs14.3bn and EBITDA margin stood at
52.7% as lower overall mine output resulted in lower integrated production in zinc, lead
and silver. Also, pressure on LME realizations resulted in sharp margin drop YoY.

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Conference call highlights: Tax rate was lower due to various tax optimization
schemes and is expected to remain in mid teens going forward. Other income was
boosted by Rs1.2bn MTM gain due to interest rate benefit on investments in
government bonds etc and higher yields on huge cash pile. New silver refinery and lead
smelter continued to get fully stabilized and custom based lead and silver production
stood at 2000 tonne and 3 tonne respectively. Mined metal output at SK mine increased
by 60% YoY and SK mine is expected to achieve 2 mtpa capacity in FY13E with
continuous improvement in silver grade from the mine. Expansion at Kayar mine is
progressing well and mining is expected to start from FY14E with a EC capacity of 0.3
mtpa. Mining at Rampura Agucha is expected to go underground by Q4FY13E with cost
of production maintained at ~US$320/tonne. For FY13E, zinc production is expected to
remain flat whereas lead and silver integrated production is expected at ~110 lakh
tonnes and 350 tonnes respectively. Capex for FY13E and FY14E is expected to be at
~Rs18-20bn (mainly on mining expansions) with sustenance capex of ~Rs4bn.
Earnings revised upwards for FY14E on lower tax: We retain our volume estimates
for FY13E/14E and also maintain our LME zinc and lead realization dollar assumptions as
we see improvement in the same going forward as demand starts to improve globally.
We lower our average tax rate to 16%/17% for FY13E/14E and also factor in higher other
income due to better yields on cash balance. Our EBITDA and PAT for FY14E have been
revised upwards by ~5% and ~10% respectively. We have revised our $/INR assumption
for FY14E to 50 from 48 earlier. We continue to factor in 50% increase in royalty
payments in FY14E post implementation of mining bill and any delay on the same could
increase our FY14E earnings estimate.
Valuations remain attractive, Reiterate Buy: We continue to like the stock due to
expected strong volume growth in lead and silver, lower overall cost proposition,
improvement in LME zinc and lead prices going forward and attractive valuations with
favorable risk-reward. We continue to value the stock at 5x FY14E EV/EBITDA. We
maintain our Buy rating on the stock with a target price of Rs 151.