Recommendations » India

Hindustan Zinc 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Hindustan Zinc (HZL)’s 3QFY2013 net sales have come above our expectations while PAT was slightly below our estimates. We recommend Buy on the stock.

Strong growth in lead and silver volumes: For 3QFY2013, HZL’s net sales increased by 14.3% yoy to Rs.3,140cr (above our estimate of Rs.3,044cr) mainly on account of a higher lead and silver production. Lead production volumes grew by 11.0% yoy to 32kt and silver production volumes grew 103.0% yoy to 117tonne. However, zinc production volumes declined by 10.0% yoy to 171kt.

Higher cost of production dents EBITDA margin: The cost of production of zinc increased by 11.0% yoy to Rs.44,900/tonne during the quarter. Hence, HZL’s EBITDA margin contracted by 348bp yoy to 47.6%. Other income was higher by 32.6% yoy to Rs.506cr while the tax rate was lower at 11.2% in 3QFY2013 (20.9% in 3QFY2012). Hence, the adjusted net profit was lower than our estimate of Rs.1,685cr and grew by 26.0% yoy to Rs.1,613cr.

Expansion projects remain on track: HZL’s board has approved the development of 3.75mtpa underground mine at Rampura Agucha and expansion of the Sindesar Khurd mine from 2.0mtpa to 3.75mtpa, Zawar mine from 1.2 mtpa to 5.0mtpa, Rajpura Dariba mine to 1.2 mtpa and Kayad mine to 1.0 mtpa.

Outlook and valuation: With a cash-rich balance sheet and strong production growth expected of lead and silver over FY2012-15, we maintain our positive stance on HZL. Although realizations are expected grow modestly, higher volumes of lead and silver are expected to drive earnings growth of 11.2% in FY2014. HZL is currently trading at an inexpensive valuation of 5.3x and 3.8x FY2013E and FY2014E EV/EBITDA, respectively. Valuing the stock at 5.0x FY2014 EV/EBITDA, we recommend Buy on HZL with a target price of Rs.149.