CMP Rs134, Target Rs141, Upside 5.2%
- HZL’s topline of Rs28.7bn was 8.7% lower on a yoy basis, but higher by 4.3% on a qoq basis. It was higher than our estimate of Rs26.1bn as the company’s topline was aided by custom smelting volumes. Due to subdued output from captive mines, the company bought ore from the external market. Mined metal output declined by 9.4% yoy to 190,000 tons from 201,821 tons in Q2 FY12 due to lower output from Rampura Agucha mine. Output from Rampura Agucha mine dropped sharply as the company is currently in the process of transforming the mine from open cast to underground. The decline in output was compensated to some extent by a ramp up at its Sindesar Khurd mine.
- As a result of lower mined metal output, production of zinc refined metal was also impacted. Zinc production volumes declined 11.8% yoy to 163,000 tons from 184,816 tons produced in Q2 FY12. The production of integrated zinc was quite low at 153,000 tons, lower than 157,000 tons achieved in Q1 FY13. Refined lead output increased 58.8% yoy to 27,000 tons from 17,000 tons achieved in Q2 FY12, but lower on a qoq basis. The refined metal output included 10,000 tons of zinc custom smelting and 3,000 tons of lead custom smelting. Silver production (excluding internal consumption) increased by 15.2% qoq and almost doubled yoy due to higher output from the new refinery.
- Operating profit remained flat on a qoq basis at Rs14.4bn (higher than our estimate of Rs13.4bn) primarily due to higher output of silver. OPM shrunk by 163bps to 50.4% due to increase in cost of production. Raw material costs remained high as the company had to buy concentrate from the open market. Raw material costs for purchase from external sources which were Rs63mn last year and Rs537mn in Q1 FY13 increased to Rs3.1bn during the quarter. Consumption of stores and spares per ton of mined metal increased due to lower mined output and falling grades. Net zinc metal cost without royalty, during the quarter increased on a qoq basis in rupee terms to Rs46,750/ton from Rs45,759/ton in Q1 FY13. In dollar terms it remained flat qoq at $844/ton.
- PAT of Rs15.4bn was above our estimate of Rs11.5bn due to a jump in other income and lower tax rate. Other income remained strong qoq at Rs5.4bn on account of some MTM gains in debt and forex. The increase in other income was largely due to MTM gains on its debt investments. Cash balance decreased from Rs194bn to Rs191bn due to dividend payment, advance tax payment and increase in inventory.
- 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 Rs134, the stock is trading at 8.8x P/E and 4.5x EV/EBIDTA on FY13E, which is inline with the range its international peers are trading at. We believe the upside remained caped due to the subdued zinc and lead prices and downgrade the stock from Buy to Market Performer with a revised 9-month price target of Rs141.
|(Rs m)||Q2 FY13||Q1 FY13||% qoq||Q2 FY12||% yoy|
|Mining & manufacturing||(11,602)||(10,670)||8.7||(9,584)||21.1|
|OPM (%)||50.4||52.0||(163) bps||54.6||(428) bps|
|Effective tax rate (%)||14.9||13.0||19.2|
|Adj. PAT margin (%)||53.7||57.6||(382) bps||51.9||184 bps|
|Extra ordinary items||-||-||-||(239)||-|
|Ann. EPS (Rs)*||14.6||15.0||(2.6)||13.0||12.5|
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||25.2||13.6||12.7||10.2|
|yoy growth (%)||21.6||12.4||16.6||8.5|
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