Buy Hindustan Zinc - Target Price: Rs.150 - Kotak

Just keep focus on turnaround in zinc industry fundamentals and ignore government stake sale delay - Zinc market might have just begun its multiple year bull run - Earning upgrades likely over new few months - Upgrade to BUY with higher TP

Zinc markets burdened by consecutive years of surplus and high inventories, went through a long, long period of largely sideways grind. Sentiment is now slowly turning positive/bullish and it has likely sustainable fundamental merit which we have tried to highlight in this note. It is the core of our investment appeal to turn aggressive buyers in Hind Zinc to play the zinc bull story in coming years. We see a reasonable probability of management improving its volume guidance for FY15 and FY16 during annual result declaration towards end of April 2014, more so given government stake sale in HZL again seems to be in back burner now. We also see gradual and sustainable recovery in global macro health from hereon which has turned us positive on cyclicals like industrial metals. So, we believe there exists a strong case for significant earning estimate upgrades for Hind Zinc in coming months.

We at this stage, have been conservative by only marginally improving zinc price estimates and tweaking volume estimates for HZL. We have raised our EBITDA estimates for FY14 and FY15 by 3% and 6.2% respectively to Rs. 71.87bn and Rs. 74.55bn respectively while EPS estimates for FY14 and FY15 is raised by 2.7% and 4.9% to Rs. 16.47 and Rs. 17.36 respectively. At CMP of Rs. 120, stock is trading at an attractive multiple of 6.9x P/E and 2.6x EV/EBITDA on FY15 estimates. We upgrade our recommendation on the stock from ACCUMULATE to BUY with a higher TP of Rs155 (vs. Rs141 earlier), which offers c.30% appreciation from these levels.

Source : Equity Bulls

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