Margin beats estimate; other income surprises • Hindustan Zinc :: ICICI Securities

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Margin beats estimate; other income surprises
• Hindustan Zinc (HZL) reported a good set of Q3FY15 numbers
wherein EBITDA and PAT were above our estimates on account
of lower-than-expected cost of production (CoP) of zinc and
better-than-expected other income
• During the quarter, zinc metal CoP before royalty stood at
| 50534/tonne (US$ 817/tonne), down 8% (10% in US$ terms)
QoQ and 3% YoY. The YoY decline in cost was due to higher
mined metal production, lower diesel cost and higher acid credits,
partly offset by lower linkage coal and increased employee
expenses on account of long-term wage agreement
• The company reported a total operating income of | 3853.1 crore
for the quarter, up 1.3% QoQ and 11.7% YoY but below our
estimate of | 4098.6 crore. The topline came in lower than our
estimate on account of lower-than-expected zinc sales
• The EBITDA came in at | 2089.2 crore (EBITDA margin of 54.2%),
up 4.5% QoQ and 14.6% YoY and above our estimate of | 2040.2
crore (EBITDA margin of 49.8%). Other income for the quarter
was at | 812.15 crore, higher than our estimate of | 620.8 crore
• The consequent PAT came in at | 2379.4 crore, up 9.0% QoQ and
38.1% YoY and higher than our estimate of | 2079.4 crore
Huge reserve base; provides strong earnings visibility
HZL is the leading miner & manufacturer of zinc and lead in India. Zinc
metal is primarily used in galvanising steel, which is further used in the
automobile & consumer goods industry while lead is primarily used in
manufacturing automobile batteries. The company has a huge reserve
base, which provides strong earnings visibility. In FY14, there was a gross
addition of 26.1 MT to reserves and resources (R&R), prior to a depletion
of 9.3 MT. Total R&R as of March 31, 2014 was at 365.1 MT containing
35.2 MT of zinc-lead metal and 28804 tonnes of silver. The overall mine
life continues to be 25+ years.
Low cost advantage aids in sustaining superior operating margins
HZL’s smelting assets are in the lowest quartile on the global cost curve.
The low cost advantage is attributable to its fully integrated nature of
operations involving mines, smelter and captive power plants.
Furthermore, HZL’s smelters are logistically well placed in Rajasthan, near
its mines, which results in low transportation and shifting costs. Hence,
low cost of operations help the company in consistently maintaining
healthy EBITDA margins.
Stable business model, robust balance sheet; recommend BUY
HZL’s integrated business model ensures steady cash flows, which
reiterates our positive stance on the company. Furthermore, HZL has a
robust balance sheet and healthy liquidity position with cash and cash
equivalents of | 28980 crore as on December 31, 2014 (cash per share of
|68.6/share, ~43% of market cap). We have valued the stock at 5.5x
FY17E EV/EBITDA. We have arrived at a target price of | 192 with a BUY
recommendation on HZL.

LINK
http://content.icicidirect.com/mailimages/IDirect_HindustanZinc_Q3FY15.pdf