Maintain 'hold' on Hindustan Zinc – TP Rs.126 - Geojit BNP Paribas Financial Services

- Made minor adjustments to FY13/14 EPS estimates for changes in volume, metal prices and forex assumptions.

- The trends in weaker grades and higher stripping ratio at Rampura Agucha are unlikely to improve dramatically in FY13 and would keep the stock performance subdued.

- Operating costs are expected to be high in FY13/14 with continuing declines in ore grades, rising domestic coal costs and rise in external concentrate purchases.

- The only catalyst for the stock could be a possible buyout of the residual government stake by Sterlite (parent company of H. Zinc) but this has seen multiple delays over the years.

- Target price of Rs.126 is set in line with the valuation of its global peers.

- With low volume growth, high operating costs and reduction in guidance for integrated silver production, a re-rating looks unlikely before finalization of the next phase of capacity expansion.

- Sharp rise/fall in Zinc or lead prices are the key upside/ downside risks in the stock.

- On the other hand, he expects a smaller surplus of Lead in 2012 with a potential deficit in 2013. In short, he remains of the view that Lead is better placed than Zinc. While a strong case can be made for both metals to move into large deficits by mid-decade, he expects Lead to begin doing so sooner, and from a starting point of far lower inventories.

- With low volume growth, high operating costs, and a reduction in guidance for integrated silver production, a re-rating looks unlikely before finalisation of the next phase of capacity expansion. Sharp rise/fall in zinc/lead prices is the key upside/downside risk.

- Analysts' view that fundamentals of zinc would continue to remain under pressure with more additions to the already bloated zinc inventory. Lead is better placed than zinc.

Source : Equity Bulls

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