>HINDUSTAN ZINC LIMITED (INDIA INFOLINE)

Upgrading zinc and lead price estimates
Zinc prices dring the month rose to a high of US$1,700/ton, levels last seen trading in Sept'08. Zinc prices have been moving higher since it formed a base around the US$1,000-1,100/ton levels at the start of the year. The stronger than expected resilience shown by the Chinese economy, implementation of huge productions cuts and buying by the Chinese Strategic Reserve Bureau (SRB) led to a surge in imports.

Volumes to witness 21.4% CAGR over FY09-11E
Hindustan Zinc Ltd. (HZL) is set to become the world's largest integrated zinc-lead producer by FY11E. We expet volumes to witness 23.1% CAGR over the period FY09-11. While the volume growth in FY10E would be achieved by the recent de-bottlenecking process, in FY11E it would come from the expansion of production capacity to 1 mtpa (by mid-2010). On our revised metal price assumption, we upgrade HZL's topline by 17.2% in FY10E and 17.1% in FY11E.

Upgrade to BUy with a target price of Rs776
HZL falls in the lower quartile of the global cost drive. Even in an environment of high input costs like coal in FY09, the company managed to keep its costs at FY08 levels. With HZL's ability to contain input costs and a scenario of rising price realisations, we expect OPM to expand 309bps over the next two years. We upgrade our previous earnings by 16.2% to Rs26.8bn in FY10E and by 8.7% to Rs 34.2bn. We expect net cash per share to rise from Rs236 at the end of FY09 to Rs290 by FY11. We upgrade our target price to Rs776/share and change our rating to BUY from Market Performer. Net of cash, the stock is currently trading at 4.2x P/E on our estimated FY11E EPS of Rs80.9.

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