Buy Hindustan Zinc - Motilal Oswal

Hindustan Zinc (HZ IN; Mkt Cap USD9.1b, CMP Rs997, Buy)

Hindustan Zinc 4QFY10: PAT in line, smelter commissioned ahead of schedule; maintain Buy

- Hindustan Zinc's (HZL) 1QFY11 PAT declined 28% QoQ (+ 24% YoY) to Rs8.9b against our est. of Rs8.3b. EBITDA was Rs10.2b (up 33% YoY) and in line with our est. of Rs10.1b and the bottom line was higher than our est. due to a lower-than-estimated tax rate of 16%.

- Net sales declined 23% QoQ to Rs19.7b (up 31% YoY) on lower realizations. Refined zinc and lead realizations per ton declined 13% and 9% QoQ respectively to Rs97,850 and Rs102,764. Sulphuric acid realization increased 72% QoQ to Rs2,605/ton. Lead production decreased 7% YoY to 14,144 tons (down 23% QoQ) and silver production grew 26% YoY to 37,176 tons (down 14% QoQ).

- On a YoY basis, the positive impact of higher LME prices and improved by-product realization on profitability was partly offset by the impact of additional gratuity provisions due to a change in the limit of salary in the Payment Of Gratuity Act, full impact of long term settlement of wage agreements, higher stripping cost at mines and higher coal and coke costs.

- A 100ktpa lead smelter with 160MW CPP at Dariba and mine development activity at Sindesar Khurd mine project is progressing well and to be completed in 2QFY11.

- Cash and equivalents grew 3.5% QoQ to Rs123.2b, most of which is invested in debt mutual funds (Rs70.5b).

- We expect zinc and lead production to ramp up in subsequent quarters. Due to volatility of LME, we have cut our price forecast for 2QFY11 from US$2,200 to US$2,000 per ton. As a result, our FY11 average LME price assumption is cut to US$2,113/ton. Thus we are revising our FY11 from Rs111.2 to 108.3 and for FY12 from Rs126.3 to Rs124.8. We are positive about the long term outlook for zinc prices. The stock trades at an EV/EBITDA of 4.9x FY11E and 3.5x FY12E and a PE of 9.2x FY11E and 8x FY12E. Maintain Buy.

Source : Equity Bulls

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