>HINDUSTAN ZINC (JM FINANCIAL)

Missing the zing thing…

■ Largest integrated zinc producer globally by FY11 - Hindustan zinc with ~5.9% (CY2008) share in total global production is currently the fourth largest zinc producing company globally. Expansion of lead-zinc metal capacity from the current 762ktpa to ~1mtpa by June 2010 will
catapult it to the top position globally.

■ Low cost producer with captive mines & captive power - Its high grade captive mines (Zn 11.4%; Pb 1.9%) with a mine life of over 20 years, represent 25m ton of equivalent zinc metal and 6.1m ton of lead metal. Captive power plants (437 MW) meet ~80% of its requirements placing it in the lowest deciles of global cost curve. Decline in international coal prices and sourcing from domestic linkages will reduce power costs further.

■ Zinc medium term price outlook to remain subdued- We believe that the recent run-up in zinc prices (55% YTD returns) would be capped due to slowing imports from China, high inventory levels and incremental supplies of ~1.1m ton of Chinese smelting capacities waiting on the sidelines. ILZSG expects a surplus of ~ 299k tons in 2009 and ~ 397k tons in 2010. Zinc is trading at ~US$1,900/ton on LME which is 47% higher than the 90th percentile cash cost of US$1,296/ton.

■ Valuations – Presence in the lowest deciles of global cost curve, aggressive capacity ramp up to 1mtpa (June 2010) and strong balance sheet with net cash of Rs228/ share, positions the company to benefit the most in case of demand and price recovery. However, a subdued price
outlook for zinc coupled with a sharp run up in stock price (~144% YTD) caps further upside. We value the stock at Rs 787/ share based on 5x FY11E EV/EBITDA. We initiate coverage with a HOLD rating.

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