Hindustan Zinc - 2QFY2013 Result Update - Angel Broking

Hindustan Zinc (HZL)'s 2QFY2013 bottom-line was ahead of our expectations due to higher-than-expected other income and lower-than-expected tax rate. We recommend Accumulate on the stock.

Strong growth in lead and silver volumes: For 2QFY2013, HZL's net sales increased by 8.8% yoy to Rs.2,822cr (above our estimate of Rs.2,733cr) mainly on account of a higher lead and silver production. Lead production volumes grew by 60.0% yoy to 27kt and silver production volumes grew 86.0% yoy to 92kt due to higher production from Sindesur Khurd mine and new Dariba lead and silver capacities.

Higher cost of production dents EBITDA margin: The cost of production of zinc increased by 20.4% yoy to Rs.46,750/tonne during the quarter. Hence, HZL's EBITDA margin contracted by 520bp yoy to 51.3% and the EBITDA decreased by 1.2% yoy to Rs.1,447cr. Other income was higher than our estimate (+39.6% yoy to Rs.540cr) while tax rate was lower than our estimate (14.9% in 2QFY2013 compared to19.5% in 2QFY2012). Hence, the adjusted net profit was higher than our estimate of Rs.1,347cr and grew by 12.8% yoy to Rs.1,544cr.

Expansion projects remain on track: HZL's underground mine development work at the Rampura Agucha mine and greenfield Kayar mine development are on schedule with commercial production expected from FY2014.

Outlook and valuation: With a cash-rich balance sheet and strong production growth of lead and silver over FY2012-14, we maintain our positive stance on HZL. In spite of an expectation of a decline in realizations, increased volumes of lead and silver are expected to drive earnings growth to 14.3% in FY2013. HZL is currently trading at inexpensive valuations of 5.2x and 3.9x FY2013E and FY2014E EPS, respectively. Valuing the stock at 4.0x FY2014 EV/EBITDA, we recommend an Accumulate view on HZL with a target price of Rs.145.

Source : Equity Bulls

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