Hold Hindustan Zinc; target of Rs 143: PINC Research

PINC Research has recommended hold rating on Hindustan Zinc with a target of Rs 143, in its July 21, 2011 research report.

“HZL’s Q1FY12 revenues grew 44% YoY to Rs28.5bn led by 19% YoY sales volume growth and higher LME zinc (up 12% YoY) and increased contribution from silver (revenue up 126% YoY). Operating profit rose 55% YoY to Rs15.9bn despite higher royalty and power cost. Profit surged 68% YoY to Rs14.9bn further aided by higher treasury income.”

“Mined metal at 188kt declined 18% QoQ due to an unplanned shutdown at Rampura Agucha mine. Nevertheless, refined metal output grew 16% YoY to 209kt. Sales volume at 211kt (incl. 5kt MIC) grew 19% YoY. Blended realisation at USD3,006/t rose 24% YoY on higher LME and increased share of silver leading to expansion in premium to LME zinc to 33.3%. Silver revenues grew 126%YoY on higher realisations (up 102% YoY, 15% QoQ to USD35.3/oz) and higher volumes (up 14% YoY). Sulphuric acid revenues increased 42% YoY. Rampura Agucha mine, which faced ~15days of unplanned closure due to pressure breakdown, has been re-started, company expects to recover loss of output in Q2,Q3FY12; SK mine operated at 80% CU during Q1 (avg. silver concentration of 120ppm); Zawar mine awaits Supreme Court approval for lease renewal. With commissioning of 100ktpa lead smelter at Dariba, HZL’s majority capex is over. The 273MW wind power expansion is on schedule for completion by Q2FY12.”

“Many global factors (EU debt crisis, inflation and monetary tightening in China & India and lack of clarity on QE3) have weighed heavy on base metal prices. However, LME zinc has underperformed further on oversupply concerns and rising inventory, despite rising global steel output (ref pg4). We have assumed avg. LME zinc price of USD2,300 and USD2,400/t for FY12 and FY13 respectively. Although we like HZL’s highly cost-competitive operations (EBITDA margin of 55%+), ~30yrs of mine life and rising silver volume amidst strong prices, lack of growth projects despite >USD3bn of treasury is a concern. Fairly valued at 5.2x FY12E EV/EBITDA. Maintain ‘HOLD’ with a TP of Rs143 (5.5x FY12E EV/EBITDA),” says PINC Research report.