Hindustan Zinc (Q4 FY12)

CMP Rs126, Target Rs141, Upside 11.9% 

• HZL’s topline of Rs31.3bn was 12.5% higher on a qoq basis led by an increase in lead and silver production from the new capacities. Zinc production volumes remained flat qoq to 190,000 tons as the company had closed down the Vizag smelter on account of higher transportation costs. Metal premiums too increased on a qoq basis. Mined metal output increased 6.7% qoq on the back of higher contribution from SK mine. Silver production (excluding internal consumption) increased by 56.3% qoq due to higher contribution from the new lead smelter and the new silver refinery. Silver production ramp up was also due to higher silver content in the ore from SK mine. 
  
• Operating profit increased by 18.3% qoq to Rs16.6bn (higher than our estimate of Rs15.5bn). OPM expanded by 260bps to 52.9% due higher metal prices. Raw material costs remained high as the company had to buy lead concentrate from the open market. Raw material costs for purchase from external sources which were nil last year increased to Rs0.8bn during the quarter. Rest of the cost header per ton of metal remained flat on a qoq basis. Net zinc metal cost without royalty, during the quarter increased marginally on a qoq basis in rupee terms to Rs41,693/ton from Rs40,300/ton in Q3 FY12. In dollar terms, it increased from US$785/ton in Q3 FY12 to US$828/ton in Q4 FY12.
  
• PAT of Rs14.2bn was inline with our estimate due to lower other income. Other income declined marginally by 0.2% qoq to Rs3.8bn. Cash balance increased from Rs163bn to Rs179bn. Depreciation increased due to the commissioning of the silver refinery during the quarter. It has recommended a final dividend of 45% (Rs0.9/share). The total dividend for FY12 stood at 120% (Rs2.4/share) which is the highest ever dividend proposed by the company.
  
• HZL commissioned the 0.1mtpa lead smelter at Dariba in Q2 FY12 and the silver refinery in Q4 FY12. Sindesar Khurd mine achieved 1.8mtpa run-rate towards the end of Q4 FY12. The progress of underground mine development work at Rampura Agucha mine and greenfield Kayar mine is as per schedule. With the commissioning of the last 15MW of our wind power generation capacity in Q4 FY12, HZL has reached a total of 274MW, making it one of the largest wind power producers in the country. HZL added 27.1mn tons to its R&R, prior to depletion of 8.04mn tons, with a total R&R of 332.3mn tons containing 35mn tons of Zinc-Lead and 912mn ounces of Silver as on 31^st March ’12.
  
• We have lowered our zinc and silver volume estimates for FY13 on account of the closure of the Vizag smelter and lower utilization rate of silver refinery. The decline in silver volumes is inline with the management guidance of 350 tons in FY13. This impact would be somewhat offset by higher lead volumes. At the CMP of Rs126, the stock is trading at 8.5x P/E and 4.1x EV/EBIDTA on FY13E, which is the lower band of the range its international peers are trading at. We believe that HZL should trade at the upper band on account of its low cost operations and maintain our BUY rating with a 9-month price target of Rs141.

Result table