Tuesday, April 24, 2012

>HINDUSTAN ZINC LIMITED: Expansion at Kayar mine is progressing (Q4FY12 results)

Silver lining in operations remains, maintain buy

Hindustan Zinc (HZL) reported better-than-expected Q4FY12 results with net sales of Rs30.9bn, up by 12.6% QoQ and PAT of Rs14.1bn, up by 10.9%QoQ. EBITDA stood at ~Rs16.6bn with margin at 53.6% (against our expectation of 52.7%), 250bps higher QoQ as new capacities in lead and silver stabilised and operational costs began to rationalise. We expect robust lead and silver volumes ahead as stabilisation process of new capacities is almost complete and maintain our positive stance on the stock on account of sound operations and attractive valuations. We factor in 50% increase in royalty from FY14E and revise our FY14E estimates lower by ~7%. Reiterate Buy with a revised lower target price of Rs151.

 Lead and silver volumes increase more than expected: Lead and silver sales went up sequentially by ~30% and ~56% respectively as both the lead smelter and silver refinery stabilisations were faster than our expectations. Zinc volumes remained subdued with closure of high cost Vizag smelter and due to falling grade in Rampura Agucha zinc mine.

 Margin shows sequential improvement: EBITDA improved by ~18% QoQ to Rs16.6bn and EBITDA margin stood at 53.6% (lower than our estimate of 52.7%) as operational costs were rationalized on account of stabilization of new capacities in lead and silver. Also, closure of high cost Vizag smelter and improvement in LME realizations helped in margin improvement QoQ.

 Conference call highlights: New lead smelter of 100ktpa operated at ~80% capacity utilization in Q4FY12 and HZL expects 90% utilization in FY13E but would require some concentrate purchase from outside. Silver refinery of 350 tpa is fully commissioned and higher silver production is expected as SK mine ramps up to 2 mtpa. Expansion at Kayar mine is progressing well and mining at Rampura Agucha is expected to go underground by Q4FY14E with cost of production at ~US$300-310/tonne. The company closed its Vizag smelter and plans to make up for its ~30000 tpa zinc capacity from its Rajasthan smelters going forward. For FY13E, zinc production is expected to remain flat whereas lead and silver integrated production is expected at ~110 lakh tonnes and 350 tonnes respectively. Total lead and silver production expected is ~150 lakh tonnes and 400 tonnes respectively in FY13E. Dividends at 20% of PAT are expected going forward.

 Earnings revised downwards for FY14E on royalty increase: We revise our earnings estimate for FY14E as we factor in ~50% increase (against proposed 100% increase in mining bill) in royalty on zinc, lead and silver from FY14E. We revise our zinc volume estimates lower for FY13E/14E and remain conservative on our LME zinc and lead realization assumptions but see upside risk to the same going forward as demand starts to improve globally. Our EBITDA and PAT for FY14E are revised downwards by ~8% and ~7% respectively. We have revised FY13E estimates upwards due to higher silver and lead volumes and cost savings on account of closure of Vizag smelter.

 Valuations remain attractive, Reiterate Buy: We continue to like the stock due to expected strong volume growth in lead and silver, lower overall cost proposition, improvement in LME zinc and lead prices going forward and attractive valuations with favorable risk-reward. We continue to value the stock at 5x FY14E EV/EBITDA. We maintain our Buy rating on the stock with a revised target price of Rs 151.