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Recommendations India

Hindustan Zinc 4QFY2014 performance highlights and results update

April 23, 2014, Wednesday, 07:26 GMT | 03:26 EST | 11:56 IST | 14:26 SGT
Contributed by Angel Broking

Hindustan Zinc (HZL)’s 4QFY2014 adjusted net profit is in line with our expectations. We recommend a Buy rating on the stock.

Lower silver volumes and prices dents top-line: For 4QFY2014, HZL’s net revenue decreased by 6.8% yoy to Rs.3,589cr (slightly below our estimate of Rs.3,644cr) mainly due to lower silver sales volumes and lower prices. Average zinc, lead and silver prices declined by 1.0%, 8.0% and 32.0%, yoy respectively, which was partially offset by 14.0% INR depreciation against the USD during the quarter. Refined zinc production was flat yoy at 182kt whereas refined silver production volumes declined 16.0% yoy to 91kt.

EBITDA decreases 17.0% yoy: The cost of zinc production rose by 24.0% yoy to Rs.55,467 per tonne due to higher diesel costs and rupee depreciation (with 2/3rd of the costs being dollar denominated); hence the EBITDA decreased by 17.0% yoy to Rs.1,755cr. The other income increased by 42.9% yoy to Rs.589cr and depreciation expenses increased by 67.5% yoy to Rs.204cr. The net profit declined by 13.8% yoy to Rs.1,881cr (in-line with our estimate of Rs.1,849cr).

Outlook and valuation: We expect robust volume growth of zinc, lead and silver over FY2014-16 while we do not expect any meaningful downside in zinc and lead prices from the current levels. HZL is currently trading at an inexpensive valuation of 3.2x and 2.2x FY2015E and FY2016E 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 3.5x FY2016E EV/EBITDA, we recommend Buy on HZL with a target price of Rs.156.