Wednesday, 27 April 2011

Hindustan Zinc : BUY


Silver-Rich Quarter; Volume Growth In Zinc
Hindustan Zinc’s (HZL) 4QFY11 EBITDA at Rs 1,967 cr (+27% YoY) was significantly above consensus (Rs 1,610 cr) & our estimates (Rs 1,750 cr) due to better-than-expected contribution from silver.
Silver revenues doubled YoY to Rs 200 cr. In addition, lead concentrate revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr due to higher levels of silver in the concentrate. Net profit was at Rs 1,770 cr (+43% YoY).

Key highlights
  • Increase in reserve base: HZL added 22 mnt to its reserve base (primarily from the Rajpura Dariba belt which includes SK mine), thereby increasing its total reserves & resources to 313 mnt.  This contains 34.7 mnt of zinc/lead metal and 885 mn ounces of silver.
  • The co. expects to commission the 100kt lead smelter in 1QFY12, post which the combined lead/zinc capacity will be 1,064kt.

Outlook
We expect zinc/lead volume growth of 19% in FY12. Ramp-up of silver-rich zinc/lead SK mine (currently operating at 85%) would enable HZL to achieve its target of exit capacity (of 500 tonnes) by end-FY12.  We estimate silver volumes of 350 tonnes and 450 tonnes in FY12E and FY13E respectively.

Key result highlights
  • Silver: Silver revenues doubled YoY to Rs 220 cr due to higher silver prices. Average silver price during the quarter was USD 32/oz vs USD in 17/oz in 4QFY10. In addition, lead concentrate sales revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr  due to higher levels of silver in the concentrate. (50% of concentrate sales during the quarter was from the silver-rich SK mine)
  • Volume: 4QFY11 refined zinc output was up  29% YoY to 194 kt, post the commissioning of the 210 kt Rajpura Dariba smelter in March 2010 (which contributed 46kt during the quarter). Concentrate sales during the quarter was 48kt as compared to 25kt in 3QFY11 and 49kt in 4QFY10.
  • Other income: Other income increased to Rs 3 bn during the quarter vs. Rs 200 cr in 3QFY11 and Rs 130 cr in 4QFY10. This was primarily due to better yields on investments. Avg. return on investment was at 8.2% during the quarter vs. 5.2% in 3QFY11 and 4.4% in 4QFY10.

Valuations
We raise our silver price estimates for FY12E and FY13E to USD30/oz each from USD 25 and USD 27 respectively, driven by the recent surge in silver prices (currently at USD 46/oz). We also reduce our tax rate for FY12E and FY13E to 18% and 20% respectively from the earlier 22%, as per mgmt guidance. Consequently, we increase our EPS estimates for FY12E and FY13E to Rs 16.8 (vs. Rs 15.5) & Rs 18.7 (vs. Rs 17.8) respectively.  We raise our TP to Rs 168 (vs. 162 earlier) – zinc business at Rs 135 (5.5x FY12 EV/EBITDA) and silver business at Rs 33 (9x FY12 EV/EBITDA). Maintain BUY on the stock.

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