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Hindustan Zinc 3QFY13 results update

Contributed by Nirmal Bang

Hindustan Zinc (HZL) organised a conference call for analysts today regarding its 3QFY13 performance. We have fine tuned our volume estimates for FY13 and FY14 post guidance by the management, while we have also revised our London Metal Exchange (LME) price assumption considering the recent strength. The above factors resulted in 4%/0.4% drop in EBITDA/PAT estimates, respectively, for FY13E. On the other hand, FY14E’s EBITDA/PAT stand revised upwards by 1%/7%, respectively. We have also revised our other income assumption and tax assumption post the management’s guidance for FY13 and FY14. We have retained our Buy recommendation on the stock, keeping the target price unchanged at Rs157 (5.0x FY14E EV/EBITDA). Following are the other takeaways:

- The company has indicated mined metal output of 260,000-270,000tn in 4QFY13E as compared to 223,000tn in 4QFY12, which would take FY13E output to 870,000tn compared to 830,086tn in FY12. It has targeted 1.00mt of zinc-lead concentrate production in FY14E, while we have estimated an output of 0.93mt.

- The company is likely to sell zinc concentrate in 4QFY13 as it is sitting on around 60,000tn of concentrate inventory, while concentrate production is likely to be higher than refined production in 4QFY13 as well. It plans to sell over 700,000tn of refined zinc and concentrate in FY13E.

- Refined zinc and lead output is expected at 190,000tn and 35,000tn in 4QFY13E, in line with the company’s expectation. The management plans to achieve 1.00mt of refined zinc-lead production in FY14E, while we have estimated 0.91mt of production.

- Integrated silver production is likely to be around 100tn in 4QFY13E, while the company has given guidance of 400tn of integrated silver production in FY14E. We have assumed 382tn of integrated silver production in FY14E.

- The company was expecting around 16-18% drop in costs/tn in 2HFY13E at the 2QFY13 post-result conference call. However, the decline was only 4% due to lower refined zinc production and a sharp correction in sulphuric acid prices. The diesel price hike of Rs10/litre will push up costs to around US$20/tn (2.4% increase in costs).

- Considering the high gestation period involved in mining expansion, HZL would go for refining capacity expansion. Beyond the mining project capex of US$250mn/year, the company is looking a sustaining a capex of US$40mn-US$50mn each year.

- The company has indicated an investment yield of 8.5% post tax after considering the softness in government bond yields in the past few weeks.