Hindustan Zinc Ltd (Q1 FY14)

India Infoline News Service | Mumbai |

We believe over the next two years earnings growth for the company would be led by higher volumes from the new lead smelter and mined metal output.

CMP Rs102, Target Rs130, Upside 27.4%

  • HZL’s topline of Rs29.8bn was 8.6% higher on a yoy basis, but lower than our estimate of Rs31.3bn. The underperformance in topline was due to no external sale of concentrate during the quarter. The company didn’t sell any concentrate in the external market against 64,000 tons sold in Q4 FY14. This led to jump in their concentrate inventory. Refined metal production was largely inline with our estimate, but lower on a qoq basis as it had taken shutdown at one of its plants. Mined metal output remained strong at 238,000 tons, 27.3% higher on a yoy basis. The increase in mined metal output was largely due to higher output from the Zawar mines. Zawar mines managed to achieve a yearly run rate of 1.1mtpa during the quarter.
  • The growth in refined metal output was constrained by the shutdown at one of its plant. Refined metal output for the quarter increased by 7.8% yoy to 207,000 tons, inline with our estimate. Production of integrated metal too remained strong on higher availability of captive concentrate. Silver production remained constrained due to closure of lead smelter. Silver sales volume stood at 87 tons, higher by 18.9% yoy, but lower than our estimate. Product premiums during the quarter increased sharply due to a jump in domestic sales volume. Product premium over LME prices for zinc increased from US$150/ton in Q4 FY13 to US$200/ton in Q1 FY14 and that of lead increased from US$160/ton in Q4 FY13 to US$247/ton.
  • Operating profit of Rs15bn was marginally lower than our estimate of Rs15.3bn. The impact of lower concentrate sales was offset by an increase in product premiums on operating margin. OPM for the quarter shrunk by 163bps yoy and 377bps qoq to 50.4%. Cost of production increased 4.1% qoq to Rs46,800/ton on account of higher stripping ratio and lower by-product realizations. We were quite surprised by the jump in costs on a qoq basis. The management has indicated that mining costs would be flat to lower from current levels over the year.
  • PAT increased 5% yoy from Rs15.8bn to Rs16.6bn in the current quarter which was higher than our estimate of Rs14.9bn. The increase in PAT was led by a lower tax rate and higher other income. Tax rate remained at 14% on account of geographical incentives from the tax schemes and investments in tax-free bonds. Other income during the quarter jumped by 8% yoy to Rs6.2bn due to a MTM gain of Rs850mn on debt funds. The company has guided for a quarterly other income of Rs5bn. Cash balance increase was lower at Rs8bn from Rs215bn to Rs223bn due to dividend payout.
  • HZL’s earnings growth has been subdued over the last two years on account of lower mined metal output and subdued metal prices. After registering a dismal H1 FY13, the company has managed to recover volumes in H2 FY13. We believe the recovery would continue in FY14 wherein the company expects mined metal output to increase 15% yoy. We believe over the next two years earnings growth for the company would be led by higher volumes from the new lead smelter and mined metal output. We expect metals prices to remain subdued in FY14 as excess capacity and high inventory would cap the upside. At the CMP of 102, the stock is trading at 6x P/E and 2.3x EV/EBIDTA on FY14E, which is lower than the range its international peers. We maintain our BUY recommendation on the stock with a 9-month price target of Rs130.
Result table
(Rs mn) Q1 FY14 Q1 FY13 % yoy Q4 FY13 % qoq
Net sales 29,842 27,477 8.6 39,087 (23.7)
Mining & manufacturing (11,513) (10,670) 7.9 (14,117) (18.4)
Personnel costs (1,781) (1,492) 19.4 (1,768) 0.7
Other overheads (1,518) (1,029) 47.5 (2,042) (25.7)
Operating profit 15,031 14,286 5.2 21,160 (29.0)
OPM (%) 50.4 52.0 (163) bps 54.1 (377) bps
Depreciation (1,843) (1,734) 6.3 (1,219) 51.2
Interest (109) (129) (15.1) (108) 1.0
Other income 6,203 5,743 8.0 4,118 50.6
PBT 19,281 18,167 6.1 23,951 (19.5)
Tax (2,671) (2,353) 13.5 (2,117) 26.1
Effective tax rate (%) 13.9 13.0
Adjusted PAT 16,610 15,814 5.0 21,833 (23.9)
Adj. PAT margin (%) 55.7 57.6 (189) bps 55.9 (20) bps
Extra ordinary items (5) - - (175) (97)
Reported PAT 16,605 15,814 5.0 21,658 (23.3)
Ann. EPS (Rs) * 15.7 15.0   5.0 20.7   (23.9)
 Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues (Rs m) 114,384 126,998 136,486 146,576
yoy growth (%) 13.9 11.0 7.5 7.4
Operating profit 61,026 64,816 68,690 75,780
OPM (%) 53.4 51.0 50.3 51.7
Pre-exceptional PAT 56,023 69,170 71,865 79,170
Reported PAT (Rs m) 55,592 68,995 71,865 79,170
yoy growth (%) 13.1 24.1 4.2 10.2

EPS (Rs) 13.3 16.4 17.0 18.7
P/E (x) 7.7 6.2 6.0 5.4
Price/Book (x) 1.6 1.3 1.1 1.0
EV/EBITDA (x) 4.1 3.3 2.3 1.4
RoE (%) 22.7 23.4 20.5 19.4
RoCE(%) 27.3 25.6 23.1 22.0
Source: Company, India Infoline Research
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