Hindustan Zinc Ltd (Q3 FY13)

India Infoline News Service | Mumbai |

We believe the upside would remain caped and maintain our Market Performer with a 9-month price target of Rs141.

CMP Rs130, Target Rs141, Upside 8.5%
  • HZL’s revenue increased 10.9% qoq and 14% yoy to Rs31.4bn which was higher than our estimate of Rs26bn. The increase in revenue was led by improved benchmark prices of LME, depreciating rupee and increased mined metal production. A jump in custom silver production led to the sharp jump in topline. Mined metal production after registering degrowth in H1 FY13, managed to recover during the quarter, increasing by 11% yoy from 209,007 tons to a record 233,000 tons during the quarter.
  • Inline with the management guidance, the production of mined metal showed healthy growth in the current quarter. Lead production increased by 11% yoy from 29,000 tons to 32,000 tons and that of silver jumped 103% yoy from 58,000 tons to 117,000 tons. However, integrated silver output was 62,000 tons as compared to 58,000 tons in the same period last year. Total zinc production was declined 10% yoy to 171,000 tons from 191,000 tons. Production of integrated zinc also declined 10% yoy from 188,000 tons to 168,000 tons.
  • Operating profit increased 6.5% yoy and 3.5% qoq to Rs14.9bn on account of higher revenue from silver. Total revenue from silver increased 66% on a qoq basis to Rs6.4bn. However, OPM declined by 300bps to 47% due to an increase in mining royalty, high custom smelting volumes and an increase in cost of production. Mining royalty jumped 33% qoq from Rs2.03bn to Rs2.69bn. Increase in consumption of bought out ore also led to a decline in operating margins on a yoy basis. An increase in consumption of stores and spares which increased 3.8% qoq to Rs3bn accounted for the increase in cost of production. Net zinc metal cost without royalty increased 11% on a yoy basis in rupee terms to Rs44,900/ton and 6% yoy to $829/ton in dollar terms. However, on a qoq basis raw material costs in rupee terms declined from Rs46,750/ton to Rs44,900/ton on the back of lower coal costs and increase in volumes. The decline in costs was restricted by the decrease in revenue from by-products. The company had indicated that sulphuric acid prices had declined sharply during the quarter. Inventory of concentrates including zinc and lead stands at 60,000 tons of which 15,000 tons is imported
  • PAT increased 5% qoq from Rs15.4bn to Rs16.12bn in the current quarter which was higher than our estimate of Rs12.5bn. The increase in PAT was led by a lower tax rate which declined from 15% to 11% qoq on account of geographical incentives from the tax schemes and investments in tax-free bonds.  The management expects the tax rate to be around 13% going into the next quarter. Cash balance of the company increased marginally from Rs191bn to Rs192.8bn during the quarter due to dividend payment, advance tax and some maintenance capex.
  • Hindustan Zinc is planning to increase its total mined capacity to 1.2mtpa in a span of six years. The benefit of the growth projects will start flowing in from the third year and would operate at full capacity from fourth year. The company plans to develop a 3.75mtpa underground mine at Rampura Agucha and expand Sindesar Khurd mine from 2mtpa to 3.75mtpa, Rajpura Dariba mine to 1.2mtpa and Kayad mine to 1mtpa. No approvals are needed to develop Rampura Agucha mine whereas the next phase of expansion at Zawar, Sindesar Khurd and Dariba mines require approvals from MoEF. A small mine at Bamnia Kalan in Rajpura Dariba belt will also be opened. The company will incur a capex of US$250mn annually over the next six years. The management expects to increase production to 1mtpa in FY14 as Zawar mines has the environment clearance of 1.5mn tons as opposed to the current 1.3mn tons and Dariba mines has environment clearance of 0.9mn tons as opposed to the current 0.6mn tons.
  • HZL’s earnings growth over the next two years would be led by higher volumes from the new lead smelter and silver refinery. After registering a dismal H1 FY13, the company has managed to recover volumes in Q3 FY13. We believe the recovery would be faster and higher in Q4 FY13 wherein the company expects mined metal output to jump sharply on a yoy basis. We expect metals prices to remain subdued in FY14 as excess capacity and high inventory would cap the upside. At the CMP of 130, the stock is trading at 7.4x P/E and 3.6x EV/EBIDTA on FY14E, which is inline with the range its international peers are trading at. We believe the upside would remain caped and maintain our Market Performer with a 9-month price target of Rs141.
Result table
(Rs mn) Q3 FY13 Q2 FY13 % qoq Q3 FY12 % yoy
Net sales 31,780 28,655 10.9 27,868 14.0
Mining & manufacturing (14,113) (11,602) 21.6 (11,862) 19.0
Personnel costs (1,692) (1,547) 9.4 (1,337) 26.6
Other overheads (1,035) (1,075) (3.7) (646) 60.2
Operating profit 14,940 14,431 3.5 14,023 6.5
OPM (%) 47.0 50.4 (335) bps 50.3 (331) bps
Depreciation (1,772) (1,746) 1.5 (1,591) 11.4
Interest (75) 21 - (87) (14.1)
Other income 5,063 5,398 (6.2) 3,819 32.6
PBT 18,156 18,104 0.3 16,164 12.3
Tax (2,031) (2,706) (25.0) (3,363) (39.6)
Effective tax rate (%) 11.2 14.9
Adjusted PAT 16,125 15,398 4.7 12,800 26.0
Adj. PAT margin (%) 50.7 53.7 (300) bps 45.9 481 bps
Reported PAT 16,125 15,398 4.7 12,736 26.6
Ann. EPS (Rs) * 15.3 14.6 4.7 12.1 26.0
 Source: Company, India Infoline Research
Financial Summary
Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenues (Rs m) 114,053 121,487 141,663 154,368
yoy growth (%) 13.6 6.5 16.6 9.0
Operating profit 60,694 58,840 74,983 81,872
OPM (%) 53.2 48.4 52.9 53.0
Reported PAT (Rs m) 55,691 61,878 74,035 81,058
yoy growth (%) 12.4 12.0 19.6 9.5

EPS (Rs) 13.2 14.6 17.5 19.2
P/E (x) 9.9 8.9 7.4 6.8
Price/Book (x) 2.0 1.7 1.5 1.3
EV/EBITDA (x) 6.1 5.4 3.6 2.7
RoE (%) 22.5 21.2 21.5 20.1
RoCE(%) 27.2 24.0 25.1 23.6
Source: Company, India Infoline Research

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