>HINDUSTAN ZINC (CITI)

Sell: 1QFY10 PAT Declines On LME Woes

■1QFY10 PAT falls 15% — Hindustan Zinc's (HZL) 1Q PAT of Rs7.2bn was 9% ahead of our estimates. The PAT decline was on account of a 30-35% decline in zinc (to US$1,476/t) and lead LME prices (to US$1,506/t) and a sharp fall in sulphuric acid prices. PAT, however, bettered estimates largely due to higherthan- expected concentrate sales. EBITDA margin was 64% vs. 72% last year.

■ Factors benefiting HZL in 1Q — Zinc volumes rose 9% yoy to ~139,000 tonnes as capacity rose by 88ktpa in 1QFY09. The element of surprise in 1Q was the sale of 74,000 tonnes of surplus zinc concentrate (vs. 10,500 tonnes last year). Rupee depreciation (49.2 vs. 41.6) helped offset the impact of lower LME prices to an extent. Effective tax rate fell to 19% vs. 24% last year as the Chanderiya Hydro I smelter was converted into an EOU in May 2008.

■ Expansions on track — HZL enhanced its zinc-lead capacity by 13% to 754ktpa in April 08. Its plan to expand by a further 210ktpa by mid-2010 is on schedule.

■ Strong balance sheet — Cash and cash equivalents on its books were Rs101bn as at 30 June 2009. This equates to Rs239/share (~36% of the current price).

■ Zinc: further through the race — Zinc LME prices have risen 44% YTD to ~US$1,600/t. This is largely because it is further ahead in the process of production cuts compared to other non-ferrous metals. It had been announced 1.2m tonnes of production to be curtailed in 2009 (18% of global supply). However, following the price rally, ~400kt has been restarted. Capacity restarts could lead to some near-term price weakness. We retain a Sell rating on HZL.

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