Hindustan Zinc - Fundamental Call - Consortium

Hindustan Zinc (HZL) deserves mention for the best management of growth expectations in the sector. One of the major investor concerns has been the company's deteriorating cost profile on account of shift from open cast mining in the company's flagship Rampura Agucha mine. We are taking a call that costs have peaked out in Q3FY13 (a culmination of highest un-integrated production in the near past and higher than normal payment of royalty) and expect a recovery over FY14/15. The recently announced mining plan also reflects a firm growth commitment over the next decade, whereby one can look at around 0.9mnte of refined Zinc production by FY18-19, a CAGR of 5% over FY13-19. Our model predicts the requirement of a Zinc smelter expansion (210ktpa) around FY18, which would result in an announcement by FY16. In effect, the volume growth ensures that the EBITDA eventually recovers in full the possible impact of the Mines and Minerals Regulation and Development (MMDR) bill over the next 6-7 years. We have maintained milled ore from Rampura Agucha ~ 6.1mnte and Zinc grade ~ 12% in our forecast horizon despite the ongoing shift to underground mining. We have a BUY rating on the stock for a target price of 135/share.

Mine development plan sanguine for volume growth over next decade. The recent announcement to increase MIC to 1.2mnte over the next six years gives a clear visibility of the growth. We assess, as MIC production ramps up, the company will require new refined Zinc/Lead/Silver capacities by FY18. One can expect capex announcement by FY15 end or FY16 beginning. Given our interaction with the management, we are sensing focus on setting up of Zinc capacities.

Cost profile to moderate on reduced concentrate purchases. We are taking a call that costs have peaked out in Q3FY13, and expect a recovery over FY14/15 (ex MMDR). We envisage lowered requirement of Zinc concentrate over FY14/FY15. The only concentrate purchases will be required to show growth in Lead and Silver production, which should continue for another two to three years. Any drop in ore production/feed-grade from Rampura Agucha can put to test our concentrate purchase/cost assumptions.

We recommend BUY. Given the renewed confidence on continued growth prospects and visibility on improving cost structure, as well as suppressed valuations which more than offsets the possible impact of the MMDR, we upgrade HZL to BUY with a maintained target of Rs 135/share (FY14-15E EV/E of 5x). Our analysis of 300 mines globally shows a clear trend of developing supply gap in Zinc MIC.

Source : Equity Bulls

Keywords