Hindustan Zinc - On track to deliver volume growth; maintain buy - Centrum

Hindustan Zinc's (HZL) Q1FY14 earnings were ahead of our estimates on the back of higher MIC production, better integrated metal volumes and higher other income. EBITDA stood at ~Rs15bn with higher than expected margin of 51.1%, driven by strong Metal-In-Concentrate (MIC) production (up 27% YoY at 238kt) and higher integrated refined zinc sales of 171kt. The company maintained guidance of 1 MT MIC zinc-lead production in FY14E, up 15% from 870 kt in FY13. We have lowered our EBITDA estimates marginally on account of cost pressures and lower by-product realizations but maintained our volume estimates as we see HZL on track to deliver volume growth. We maintain Buy on strong fundamentals and cheap valuations (currently trading at 2.6x FY14E EV/EBITDA).

Volumes on expected lines with higher MIC production: MIC production went up by ~27% YoY to 238kt and integrated volume share stood at 100% in zinc, 90% in lead and ~80% in silver. Zinc volumes stood at 1.71 lakh tonne, up by ~6.4% YoY. Lead volumes stood at 30kt, up 3.4% YoY. Silver production stood at 96 tonne with integrated production volumes of 77 tonne and sales volumes of 92 tonne.

Margins robust despite realization pressure: EBITDA margin stood at 51.1% despite pressure on realizations of zinc, lead and silver as rupee depreciation and higher sales volumes mitigated the impact. EBITDA was up 5% YoY at ~Rs15bn. We however do not expect margins to sustain at similar levels but settle down lower on account of lower realizations going ahead.

Conference call highlights – Higher MIC output and stable costs ahead: Company has maintained its guidance for 1 MT of MIC output in FY14E (up by 15% YoY) backed by 60kt MIC output from 1.2 mtpa Zawar mines (run rate of ~1.1mtpa achieved in June), 30kt MIC output from 0.35 mtpa Kayar mine and increase in SK mine ore production from 1.6 mtpa to 2mtpa. Integrated silver production is expected to be ~360 tonne in FY14E and surplus concentrate sales of ~70kt are expected in FY14E (mainly in H2FY14E). Cost of production is expected to remain stable due to operational efficiencies and high mechanization. Tax rate stood at ~13.9% in Q1FY14 and is expected to remain in mid teens during FY14-15E. Other income was higher due to MTM gain of Rs850mn but management guided for quarterly run rate of ~Rs5bn for other income.

Earnings revised downwards marginally: We maintain our mined metal production estimate of 955kt/1005kt in FY14E/15E as we continue to believe that HZL will see mining expansion-led growth from the starting of Kayar and Zawar mines. We expect integrated metal sales volumes of 747kt/120kt for zinc/lead in FY14E, a growth of 13%/12% respectively. We remain conservative on LME assumptions for zinc and lead due to global uncertainty. Our EBITDA and PAT for FY14E are revised downwards by ~3% and ~2.5% respectively.

Valuations remain attractive; reiterate Buy: We continue to like the stock due to the expected strong volume growth led by mining expansions, lower overall cost proposition and attractive valuations with favorable risk-reward. Strong cash pile, high free cash flow generation and cheap valuations at 2.6x FY14E EV/EBITDA further cement our positive view on the stock. We value the stock at 4.5x FY15E EV/EBITDA to arrive at a fair value of Rs142. Maintain Buy.

Source : Equity Bulls

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