Buy Hindustan Zinc - PINC Result Review

Capacity expansion bolsters volume

HZL's Q2FY11 revenue increased 21% YoY to Rs22bn, owing to 13% YoY rise in metal sales (aided by 39kt output from newly commissioned 210ktpa zinc smelter at Rajpura Dariba) and higher LME zinc price (up 15% YoY). Operating profit grew by a subdued 3% YoY to Rs11.0bn on higher royalty and mining cost. PAT grew by 1.5% YoY to Rs9.5bn. HZL has cash and equivalent of Rs122bn as of Q2FY11.

By-product gains: Silver revenue grew 58% YoY and Sulphuric acid revenue grew by 260% YoY on increased volume and better realizations

OUTLOOK

Although we were expecting a rebound in LME Zinc prices, we are surprised by a strong rise of 38% since Jul'10. We revise our LME zinc per tonne price estimates for FY11 and FY12 to USD2,150 (USD2,000) and USD2,250 (USD2,100) respectively.

VALUATIONS AND RECOMMENDATION

At CMP of Rs1,209, the stock is attractively valued at 4.6x FY12 EV/EBITDA, given volume CAGR of 10% over FY10-FY12E, highly cost-competitive operations (EBITDA margin 55%+), >30 years of mining life and strong cash position. We maintain 'BUY' with a revised target price of Rs1,348 (5.5x FY12 EV/EBITDA).

Source : Equity Bulls

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