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Recommendations India

Hindustan Zinc 3QFY2014 performance highlights and results update

January 20, 2014, Monday, 10:19 GMT | 05:19 EST | 14:49 IST | 17:19 SGT
Contributed by Angel Broking

Hindustan Zinc (HZL)’s 3QFY2014 operating results were in line with our expectations while the adjusted net profit was slightly below our expectations. We recommend a Buy rating on the stock.
Strong growth in zinc and silver volumes: HZL’s net revenue increased by 8.6% yoy to Rs.3,410cr (in line with our estimate of Rs.3,446cr) led by increased sales volumes of zinc, lead and silver. Refined zinc production (integrated) volumes increased 17.0% yoy to 196kt due to higher production from the Rampura Agucha mine and Zawar mines; refined silver production (integrated) volumes also grew 35.0% yoy to 72kt.
HZL lowers production guidance: The company has lowered its FY2014 mined metal production guidance from 950,000 tonnes to 900,000 tonnes due to slower than expected ramp-up in the underground mining projects. It has also lowered the guidance for integrated silver production from 335MT to 300MT for FY2014.
EBITDA increases 22.1% yoy: The company’s cost of zinc production rose by 16.0% yoy to Rs.52,014/tonne due to higher diesel costs (+30%) and rupee depreciation as most inputs costs are related to international prices. The EBITDA however grew by 22.1% yoy due to lower staff costs (-6.0% yoy to Rs.159cr) and lower mining royalty (-3.7% yoy to Rs.259cr). However due to higher depreciation and taxes, the net profit grew by a muted 6.8% yoy to Rs.1,723cr (slightly below our estimate of Rs.1,795cr).
Outlook and valuation: We expect robust volume growth of zinc, lead and silver over FY2013-15 while we do not expect meaningful downside in zinc and lead prices from current levels. HZL is currently trading at an inexpensive valuation of 3.8x and 3.0x FY2014E and FY2015E EV/EBITDA, respectively. A cash-rich balance sheet, low cost of production and inexpensive valuations make HZL an attractive bet at the current price levels. Valuing the stock at 4.5x FY2015E EV/EBITDA, we recommend Buy on HZL with a target price of Rs.154.