Hindustan Zinc Ltd: ‘Silver to add shine’ - Annual Report Analysis

India Infoline News Service | Mumbai |

In FY12, HZL managed to commission its 0.1mtpa lead smelter, 350tpa silver refinery and ramped up its mining capacity at Sindesar Khurd to 2mtpa.

CMP Rs115, Target Rs137, Upside 18.9%

Hindustan Zinc Ltd (HZL) in its FY12 annual report highlights the expansion in its product making capacities, the accretion in reserves and its initiative towards green energy. In FY12, HZL managed to commission its 0.1mtpa lead smelter, 350tpa silver refinery and ramped up its mining capacity at Sindesar Khurd to 2mtpa. However during the year, grade of zinc metal in concentrate declined sharply from 13.09% to 11.98% at the Rampura Agucha mine (accounts for 88% of total mined metal). With the commissioning of the Phase II wind power projects, it has become one of India’s largest green energy producers. HZL is trading at its lower band (3.4x FY13 EV/EBIDTA), which we believe is a good entry point. We maintain our BUY rating on the stock with a revised 9-month price target of Rs137.


Costs to stay higher: Rising power costs & falling metal grades

HZL’s Cost of Production (CoP) has been on the rise over the last few years on account of increase in royalty, rising power costs and an increase in its strip ratio. We believe this would continue going ahead as Coal India has raised prices for non-power consumers and the strip ratio at Rampura Agucha is expected to remain high. However, the management expects the strip ratio to decline from H2 FY13. The impact of increase in costs would be offset by the jump in revenue from sale of silver. We expect OPM to expand 360bps yoy in FY13 to 56.8% from 53.2% in FY12. 


Valuations attractive; Silver to drive earnings

HZL over the last six months has commissioned the 0.1mtpa lead smelter in Dariba, the 350tpa silver refinery in Pant Nagar and has ramped-up of the SK mine from 1.5mtpa to 2.0mtpa. We believe this would play a pivotal role for the company over FY12-14E. We expect zinc and lead prices to stay subdued over the next two years as the market remains in an oversupply mode. However, the strength in the silver prices would boost margins for the company. HZL has been trading at a one year forward EV/EBITDA in the range of 3-8x for the past five years (Average one year forward EV/EBIDTA of 4.6x). We have taken a marginally lower multiple of 4.5x for our valuation, which is in line with the current weakness in the zinc cycle and sluggishness in demand. We maintain our BUY rating on the stock with a revised 9-month price target of Rs137.


Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 100,391 114,053 129,613 139,007
yoy growth (%) 25.2 13.6 13.6 7.2
Operating profit 56,226 60,694 73,601 77,607
OPM (%) 56.0 53.2 56.8 55.8
Pre-exceptional PAT 49,366 55,691 66,026 70,146
Reported PAT 49,154 55,260 66,026 70,146
yoy growth (%) 21.6 12.4 19.5 6.2
         
EPS (Rs) 11.7 13.2 15.6 16.6
P/E (x) 10.0 8.9 7.5 7.0
P/BV (x) 2.2 1.8 1.5 1.3
EV/EBITDA (x) 6.1 5.2 3.4 2.4
ROE (%) 24.3 22.5 22.4 20.2
ROCE (%) 28.4 27.2 27.6 25.0
Source: Company, India Infoline Research
BSE 289.85 1.15 (0.40%)
NSE 290.70 1.90 (0.66%)

***Note: This is a NSE Chart

 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.