>HINDUSTAN ZINC LIMITED (ICICI DIRECT)

Got the zing…

Hindustan Zinc (HZL) is India’s largest and the world’s second largest integrated producer of zinc and lead with total metal production capacity of ~7.54 lakh tonne per annum (TPA). With its world class mining and smelting assets ensuring low cost of operations, strong volume CAGR of
~13% in FY09-12E through expansion and robust balance sheet with cash/share of ~Rs 240 (June’09), the company is set to ride the bumps in the commodity cycle with ease. We expect HZL to register a CAGR of 16.1% and 17.8% in net sales and net profit, respectively, from FY09-12E. We are initiating coverage on the stock with an OUTPERFORMER rating.

■ Capacity expansion of integrated operations continues
HZL has increased its zinc capacity threefold since 2002. The company is currently implementing a 3.1 lakh TPA capacity expansion plan, which would catapult it to the No. 1 spot among integrated zinc-lead producers in the world. The expansion would help the company to register a sales volume CAGR of ~13% in FY09-12E, reaching zinc sales of ~7.5 lakh tonne in FY12E.

■ Ever increasing reserves and resources
Through aggressive exploration and drilling activities, the reserves and resources of its world class captive mining assets are continuously increasing. HZL currently holds ~31 million tonne (MT) of contained zinc-lead metal in its mines. This translates into remaining operational life of more than 30 years at an expanded capacity of ~1 MT.

■ Immune to down cycles on low cost of production
HZL boasts of one of the lowest cost operations in the world. With current cost of production at ~US$700/tonne, it remains largely immune to commodity down cycles.

■ Valuations leave room for upside
At the current market price of Rs 736.7, the stock is trading at 4.5xFY11E EV/EBITDA and 8.9x FY11E EPS of Rs 82.9. We expect an upward re-rating of the stock, going forward and value the stock at 6.5xFY11E EV/EBITDA. We are assigning a target price of Rs 910 to the stock and initiating coverage on HZL with an OUTPERFORMER rating.

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