Hindustan Zinc: Higher mining volumes help deliver a strong quarter :: Kotak Securities

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Higher mining volumes help deliver a strong quarter. Hindustan Zinc’s EBITDA
grew 5% qoq on the back of strong mined volumes. HZ is deepening Rampura Agucha
open cast mine by additional 50 meters, which hedges the risk of any potential
production loss during the transition to underground mining. We expect HZ to benefit
from improving zinc fundamentals due to constrained global mine supplies. We
incorporate our economist’s revised Fx rate and increase EBITDA estimate by 8-13% for
FY2015-17E. Our fair value increases to `205 from `190 earlier. The stock is
inexpensive and trades at 3.6X FY2016E EBITDA; upgrade to BUY (from ADD earlier).

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3QFY15 results: strong EBITDA aided by 14% qoq increase in mined metal volumes
Hindustan Zinc reported EBITDA of `20.9 bn (+15% yoy, +5% qoq), in line with our estimate.
Strong EBITDA growth was led by increase in mined metal volumes by 14% qoq to 242,000
tons (+10% yoy). The increase was driven by higher production from Rampura Agucha mine
and better ore grades. We note that HZ had excavated higher waste material in previous
quarters and hence exposed more ore-enabling higher contained-metal mining in the current
quarter. Accordingly, refined zinc production increased 10% qoq to 196,000 tons (-2% yoy).
Lead and silver productions stood at 30,000 tons (flat qoq, +25% yoy) and 85 tons (+6% qoq,
+16% yoy).
HZ’s net income increased 9% qoq to `23.8 bn (+38% yoy) and was aided by (1) strong other
income of `8.1 bn (+91% yoy, +17% qoq) led by MTM gains on debt instruments due to
decline in interest rates and (2) lower effective tax rate of 11.6%.
Mine transition: Rampura Agucha open cast mine life to be extended till FY2020
HZ’s Board has approved deepening of Rampura Agucha open cast mines by another 50
meters, resulting in extended life of open pit operations until FY2020. We believe this move was
essential given the time required to develop the underground mine could have risked
production decline in the interim years of mine development. The pre-stripping work for the
mine deepening will start from 4QFY15 and will bump up cost of production.
Maintains marginal volume growth in FY2015E; HZ to benefit from strong zinc pricing outlook
HZ has maintained marginal volume growth guidance for FY2015E compared to 880,000 tons
in FY2014. We find the guidance aggressive noting 9% 9MFY15 decline in the company’s
mined metal volumes; implied guidance of 263K tons in 4QFY15 is aggressive. We expect HZ to
benefit from improving fundamentals of zinc. The unavoidable closures of large zinc mines
(including Century) from depleting reserves over the next 1-2 years drive our positive view. Our
base-case zinc price assumption has upside risks. We incorporate our economist’s revised Fx rate
assumption and increase our EBITDA estimate for FY2015-17E by 8-13%. Our fair value
increases to `205 from `190 earlier. We upgrade the stock to BUY from ADD.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily20012015ch.pdf