Hindustan Zinc Ltd (Q1 FY15)

CMP Rs164, Target Rs198, Upside 20.7%
 
² HZL’s operating numbers were weaker than expected due to a decline in mined metal output
² Mined metal output decline was higher than expected at 31.5% yoy against our expectation of 24% yoy. HZL is transforming its open cast operations at Rampura Agucha from to Underground mining leading to lower mined metal output
² Cost of production remained high due to lower mined output and lower refined metal production
² Stronger than expected other income growth cushioned the impact of lower operating profit on bottomline
² We have lowered our metal output estimate in FY15 on expectations of a lower than expected mined metal from Rampura Agucha
² HZL remains one of our preferred picks in metal sector due to inexpensive valuations and firm zinc prices

Result table

(Rs mn)	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Net sales	30,072	29,842	0.8	36,427	(17.4)
Mining & manufacturing	(13,642)	(11,513)	18.5	(15,448)	(11.7)
Personnel costs	(1,617)	(1,781)	(9.2)	(1,663)	(2.8)
Other overheads	(1,288)	(1,518)	(15.1)	(1,763)	(27.0)
Operating profit	13,524	15,031	(10.0)	17,552	(22.9)
OPM (%)	45.0	50.4	(540) bps	48.2	(321) bps
Depreciation	(2,023)	(1,843)	9.7	(2,041)	(0.9)
Interest	(76)	(109)	(30.5)	(203)	(62.5)
Other income	7,174	6,203	15.7	5,887	21.9
PBT	18,599	19,281	(3.5)	21,195	(12.2)
Tax	(2,422)	(2,671)	(9.3)	(2,383)	1.6
Effective tax rate (%)	13.0	13.9		11.2
Adjusted PAT	16,177	16,610	(2.6)	18,812	(14.0)
Adj. PAT margin (%)	53.8	55.7	(187) bps	51.6	215 bps
Extra ordinary items	-	(5)	(100)	-	-
Reported PAT	16,177	16,605	(2.6)	18,812	(14.0)
Ann. EPS (Rs)	15.3	15.7	(2.6)	17.8	(14.0)

Source: Company, India Infoline Research

Mined metal output remains impacted due to transformation of open cast to underground mining 

HZL’s mined metal output has been declining over the last one year as the company is transforming its operations at its largest mine, Rampura Agucha. Mined metal output for the quarter was at its lowest in the last four years. The company has indicated that output would be lower in H1 FY15 and would be ramped up in H2 FY15 as the output currently has higher percentage of waste. With the operations expected to touch the ore body in H2 FY15, mined metal output would be quite strong. Refined metal output too was quite lower during the quarter due to lower mined metal availability and maintenance shutdown. The impact of lower metal sales on topline was somewhat negated by higher metal prices and strong product premiums. Product premiums continued to gain on a qoq basis as spot market remained tight. Integrated silver production too was quite lower than expected.

Quarterly production data

(Rs mn)	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Total mined ore	163,000	238,000	(31.5)	200,000	(18.5)
Zinc refined metal	141,000	174,000	(19.0)	182,000	(22.5)
Lead refined metal	31,000	33,000	(6.1)	36,000	(13.9)
Total refined metal	172,000	207,000	(16.9)	218,000	(21.1)
Silver sales	82,000	87,200	(6.0)	91,000	(9.9)

Source: Company, India Infoline Research

Lower metal production led to a decline in operating profit

HZL’s operational performance was weaker than expected due to lower mined metal production and also on account of maintenance shutdown of one of its smelters. Operating profit for the quarter was lower by 10% yoy to Rs13.5bn, lower than our estimate of Rs16bn. Cost of production too increased on a qoq basis due to lower volumes, lower output from its open cast mines and a jump in mining costs due to higher amount of waste. The share of waste of total output was higher as the company is transforming into underground mining and it will take some time to reach to the ore body. CoP increased by 28.4% yoy and 8.3% qoq to Rs60,093/ton in Q1 FY15. In dollar terms, CoP excluding royalty increased by 20.2% yoy and 11.8% qoq to US$1,005/ton, highest in the last five years. By product realisations continued to remain subdued for the quarter and are expected to remain sideways in FY15.  The management expects cost of production to decline sharply in H2 FY15 on the back of higher volumes and higher mining yield.

Quarterly cost analysis

As a % of net sales	Q1 FY15	Q1 FY14	bps yoy	Q4 FY14	bps qoq
Mining & manufacturing	45.4	38.6	679	42.4	296
Personnel costs	5.4	6.0	(59)	4.6	81
Other overheads	4.3	5.1	(80)	4.8	(56)
Total costs	55.0	49.6	540	51.8	321

Source: Company, India Infoline Research

Impact of lower operating profit was offset by a jump in other income

The impact of lower operational profit was more than offset by a strong qoq growth in other income. HZL reported a 21.9% qoq growth in other income to Rs7.2bn, higher than our estimate of Rs4bn. Effective tax rate for the quarter remained lower than the 15% guided earlier at 13%. PAT for the quarter stood at Rs16.2bn, higher than our estimate. The company had cash and cash equivalents of Rs262bn, out of which Rs221bn was invested in debt mutual funds, Rs20.5bn in bonds and Rs20bn in fixed deposits.

Valuation inexpensive; Maintain BUY

We believe that the tight market condition in zinc global market would continue in 2014 as we estimate demand from the developed nations of US, Europe and Japan would be higher due to the on-going monetary easing in the regions. We have lowered our mined metal estimates for FY15 to factor in the sharp decline in volumes in Q1 FY15. However, we have maintained our FY16 volumes on expectations of a revival in H2 FY15. We believe going ahead earnings for the company would receive a boost from the increase in mined metal output, firm zinc & lead prices and higher operational efficiencies. We expect HZL to witness earnings CAGR of 5.1% over the period FY14-16E even on our assumption of a stronger rupee in FY16. At the CMP, the stock is trading at 8.6x P/E and 4.1x EV/EBIDTA on FY16E, which is lower than the range of its international peers. Current cash and cash equivalents of Rs262bn (36% of current mcap) is expected to rise to Rs366bn (53% of mcap). We maintain our BUY recommendation with a revised price target of Rs198.

Financial Summary

Y/e 31 Mar (Rs m)	FY13	FY14	FY15E	FY16E
Revenues	126,998	136,361	146,776	152,409
yoy growth (%)	11.0	7.4	7.6	3.8
Operating profit	64,816	69,616	76,318	79,263
OPM (%)	51.0	51.1	52.0	52.0
Pre-exceptional PAT	69,170	69,663	77,000	80,228
Reported PAT	68,995	69,046	77,000	80,228
yoy growth (%)	24.1	0.1	11.5	4.2
EPS (Rs)	16.4	16.5	18.2	19.0
P/E (x)	10.0	9.9	9.0	8.6
Price/Book (x)	2.1	1.9	1.6	1.4
EV/EBITDA (x)	7.4	6.3	5.0	4.1
Cash per share (Rs)	50.9	60.4	74.2	86.8
RoE (%)	23.4	20.0	19.1	17.3
RoCE (%)	25.6	22.2	21.2	19.3

Source: Company, India Infoline Research