Hindustan Zinc - Keeps pace with mining growth target - Centrum

We interacted with HZL IR for an update on the current operational performance. MIC production target of 1mtpa for FY14E remains on course and Q1FY14 MIC production is expected at ~230 ktpa (up ~23% YoY). Custom volumes are expected to remain negligible in FY14E (in line with earlier guidance) and progress of mining expansions is on track. We continue to see HZL keeping pace with its stated mining growth plan which will lead to an increase in output from various mines and result in higher integrated metal volumes ahead. Weakness in LME metal prices has been compensated by sharp rupee depreciation and we adjust our estimates for the same accordingly. We cut our earnings estimates marginally and see valuations extremely attractive at current levels. Maintain Buy.

- MIC output strong in Q1FY14, 1MTPA guidance on track for FY14E - Mining output continues to gain traction as per guidance and zinc-lead Metal In Concentrate (MIC) production is expected to be up ~23% YoY to ~230kt for Q1FY14E. HZL remained confident on achieving 1mtpa MIC guidance for FY14E.

- Volume traction starts from Zawar mine - Zawar mine has seen production pickup (post receipt of approvals in Q4FY13) and Q1FY14 mining run rate stood at 0.8 mtpa. Zawar production run rate is expected to reach the targeted 1.2 mtpa by July'13 and mined metal production from Zawar is expected to be ~50-55kt in FY14E as compared to 12kt in FY13. Kayar mine's development continues (tunnels and slopes being created) and commercial production is expected to start by H2FY14E with ore production target of 0.3 mtpa resulting in ~25kt MIC contribution from Kayar in FY14E. Steady increase in overall output at SKM continues and underground mining at RAM is expected to start by H2FY14E. We expect HZL to achieve 955kt MIC production in FY14E, up by 9.8% YoY.

- Higher integrated production going ahead - We see HZL producing higher integrated metal volumes going ahead on account of better MIC production and growth in volumes from SKM & Zawar (which have high content of lead and silver in ore). Q1FY14 refined metal production of zinc and lead are expected to be completely integrated with volumes of 180kt and 29kt respectively. HZL has not done surplus concentrate sales during Q1FY14 and would be using the same for metal production going ahead. We expect integrated metal sales volumes of 747kt/120kt for zinc/lead in FY14E, implying strong YoY growth of 13%/12% respectively. We also expect silver integrated volumes of 350t in FY14E, up ~9% from 322t in FY13.

- Weakness in LME metal prices made up by lower rupee - LME prices for zinc/lead are down by ~9%/11% QoQ but sharp weakness in rupee has cushioned the adverse impact completely. Rupee has fallen to 60+ levels against dollar and continuation at current levels will lead to benefits for HZL from effective realizations. We note that for 1% depreciation in rupee, HZL's EBITDA goes up by 1.4% and EPS goes up by 1.1%.

- Earnings revised marginally - We have revised our LME assumptions down by 5% for both zinc and lead and reduced our volume estimates marginally. We have revised our USD/INR assumptions for FY14E/15E to 57/56 from 53/52 earlier. We revise our EBITDA estimates downwards marginally.

- Attractive valuations - The stock is trading at very attractive valuations of 2.2x FY14E EV/EBITDA and 6x FY14E P/E. We see integrated volume traction led by mining growth to provide the rerating for the stock. We value the stock at 4.5x FY15E EV/EBITDA to arrive at a fair value of Rs144. Maintain Buy.

Source : Equity Bulls

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