>HINDUSTAN ZINC LTD. (RELIANCE MONEY)

On Expected Lines…

Q409 results of Hindustan Zinc Ltd. (HZL) were as per our expectations. HZL reported net revenue of Rs. 12.9 bn (down by 43%), an EBIDTA of Rs.6.05 bn (cut by 61%) and PAT of Rs. 5.5 bn (a decline of 57%). The EBIDTA margins witnessed a correction of 2235 bps. Average realizations for Q409 for Zinc and Lead were $1174/tonne and $1160/tonne respectively.

Margins compression was less severe than forecasted: Q409 had experienced a highly volatile Zinc trading at LME. The Zinc prices dropped from $1300/tonne to a low of $1110/tonne before rising back to $1300/tonne level. Though HZL finds itself in the first quartile of the cost curve, the volatility of the Zinc and Lead prices on LME were expected to affect the margins. We had foreseen a margins squeeze of 3200 bps taking the EBIDTA margins to 37% in our quarterly preview. However, the company bettered our expectations by posting an EBIDTA margin
of 47%.

Valuation:
The stock has appreciated sharply in the span of last 2 months concomitant with the market rally. At CMP the stock quotes at P/E of 6.4x and EV/EBIDTA of 1.9x for FY2011E earnings. The company is virtually debt-free and cash rich with cash of Rs. 232 per share. Considering positive prospects for the LME Zinc prices in future we upgrade the stock to a Hold with a price target of Rs. 590. At the target price the stock would quote at an EV/EBIDTA of 2.5x for FY2011E earnings.

Zinc in slight Surplus
Consumption of Zinc is directly related to the Steel Industry prospects. Currently, LME is having a stock inventory of 0.34 mmT for Zinc and 0.063 mmT for Lead. The Zinc inventory is less than 3% of the global annual consumption and it is expected to remain flat with negative bias which may prop up the Zinc prices currently at $1475/ tonne. As per ILZGS, the global Zinc surplus for CY2009 is expected to be 0.26 mmT which is less than the current stock inventory at LME. We assume an average $1550/ tonne for Zinc and $1500/tonne for Lead for FY10E and $1650/tonne for Zinc and $1550/tonne for Lead for FY2011E respectively.

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