1. 1QFY2011 Result Update | Base Metals
July 23, 2010
Hindustan Zinc BUY
CMP Rs988
Performance Highlights Target Price Rs1,227
Particulars % chg % chg Investment Period 12 months
1QFY2011 1QFY2010 4QFY2010
(Rs cr) (yoy) (qoq)
Net sales 1,951 1,512 29.0 2,498 (21.9) Stock Info
EBITDA 1,022 782 30.6 1,548 (34.0) Sector Base Metals
EBITDA margin (%) 52.4 51.7 65bp 62.0 (959bp) Market Cap (Rs cr) 41,744
Net profit 891 719 23.9 1,239 (28.1) Beta 1.2
Source: Company, Angel Research 52 Week High / Low 1,325/652
Avg. Daily Volume 52938
Hindustan Zinc (HZL) reported net revenue of Rs1,951cr in 1QFY2011, which was
below our estimates of Rs2,392cr. Net profit at Rs891cr was also below our Face Value (Rs) 10
estimates of Rs1,158cr. BSE Sensex 18,131
Nifty 5,449
Earnings not impressive: HZL’s net revenue grew by 29% yoy to Rs1,951cr and
Reuters Code HZNC.BO
declined by 21.9% on a qoq basis. The deviation in the top line was because of a)
low-grade ore production from Rampura Agucha mine, b) maintenance work at Bloomberg Code HZ@IN
one of the company’s mills, c) lower production due to water shortage and d)
absence of concentrate sales. Despite strong top-line growth, the company’s
Shareholding Pattern (%)
operating margin was flat on a yearly basis at 52.4%, mainly due to increased a)
mining and manufacturing costs (increased stripping, coal and coke costs), b) Promoters 64.9
consumption of stores and spares and c) staff costs (additional gratuity provisions MF / Banks / Indian Fls 31.0
and impact of wage settlement). Consequently, EBITDA came in at Rs1,022cr, FII / NRIs / OCBs 1.9
higher by 30.6% yoy, and net profit increased by 23.9% yoy to Rs891cr. Indian Public / Others 2.1
Outlook and Valuation: At the CMP of Rs988, the stock is trading at 5.6x
FY2011E and 3.5x FY2012E EV/EBITDA. HZL is expected to benefit from the
Abs. (%) 3m 1yr 3yr
expansion of zinc-lead smelting capacity and increased silver production along
with 100% backward linkages. In addition, HZL has a huge cash balance of Sensex 2.5 19.0 15.2
Rs12,323cr at the end of the quarter (Rs292 per share), and plans of Sterlite Hindustan Zinc (18.8) 44.2 26.3
Group to buy out the remainder of the government’s holding can provide a
further upside. We maintain our Buy recommendation on the stock with a revised
Target Price of Rs1,227 (earlier Rs1,399), valuing the stock at 6x FY2012E
EV/EBITDA.
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 5,680 8,017 8,515 10,559
% chg (27.9) 41.1 6.2 24.0
Net profit 2,728 4,041 4,077 5,268
% chg (38.0) 48.2 0.9 29.2
EPS (Rs) 64.6 95.6 96.5 124.7
EBITDA margin (%) 48.1 58.3 56.2 58.3
P/E (x) 15.3 10.3 10.2 7.9 Paresh Jain
P/BV (x) 2.9 2.3 1.9 1.6 Tel: 022-40403800 Ext: 348
RoE (%) 20.8 24.9 20.4 21.6 pareshn.jain@angeltrade.com
RoCE (%) 18.0 25.6 20.7 22.3
Pooja Jain
EV/Sales (x) 5.7 3.7 3.2 2.0
Tel: 022-40403800 Ext: 311
EV/EBITDA (x) 11.7 6.4 5.6 3.5 pooja.j@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Hindustan Zinc |1QFY2011 Result Update
Exhibit 1: 1QFY2011 performance
(Rs cr) 1QFY11 1QFY10 yoy % FY10 FY09 yoy %
Net sales 1,951 1,512 29.0 8,017 5,680 41.1
Mining & manufacturing
570 500 14.0 1,961 1,906 2.9
exp.
% of net sales 29.2 33.1 24.5 33.5
Mining royalty 155 92 68.7 613 364 68.2
% of net sales 8.0 6.1 10.8 6.4
Staff cost 148 81 84.0 457 365 25.3
% of net sales 7.6 5.3 8.1 6.4
Admin and selling 78 72 8.9 316 311 1.4
% of net sales 4.0 4.7 5.6 5.5
Total expenditure 952 744 27.8 3,347 2,946 13.6
% of net sales 48.8 49.2 58.9 51.9
EBIDTA 1,022 782 30.6 4,670 2,734 70.8
% of net sales 52.4 51.7 82.2 48.1
Interest 7 3 104.7 44 22 100.7
Depreciation 112 75 50.1 334 285 17.2
Other income 158 180 (12.1) 722 931 (22.4)
Exceptional items 0 0 0 0
Profit before tax 1,061 884 20.0 5,014 3,358 49.3
% of net sales 54.4 58.5 88.3 59.1
Provision for tax 170 166 2.9 973 631 54.2
% of PBT 16.1 18.7 19.4 18.8
Profit after tax 891 719 23.9 4,041 2,728 48.2
% of net sales 45.7 47.5 50.4 48.0
EPS (Rs) 21.1 17.0 23.9 95.6 64.6 48.2
Source: Company, Angel Research
Exhibit 2: 1QFY2011 - Actual vs. Angel estimates
(Rs cr) Actual Estimates chg (%)
Net sales 1,951 2,392 (18.4)
EBITDA 1,022 1,437 (28.9)
EBITDA margin (%) 52.4 60.1 (772bp)
PBT 1,061 1,452 (26.9)
PAT 891 1,158 (23.1)
Source: Company, Angel Research
Top-line growth not impressive
During 1QFY2011, HZL’s mined zinc production was higher by 11.2% yoy but
declined sequentially by 3.9% to 164,063 tonnes. Mined lead production was
lower by 13.3% yoy and 21.4% qoq to 17,868 tonnes. Mined metal production
was lower primarily due to a) low-grade ore production from Rampura Agucha
mine, b) water shortage at existing plants and c) maintenance work at one of the
company’s mills.
July 23, 2010 2
3. Hindustan Zinc |1QFY2011 Result Update
Despite mined zinc production declining sequentially, zinc metal sales volume
increased by 8.7% qoq and 19.2% yoy to 164,445 tonnes on account of the
commissioning of the 210ktpa zinc smelter at Rajpura Dariba in 4QFY2010, which
produced 33,000 tonnes in 1QFY2011. Lead metal sales volume decreased by
6.6% yoy and 23.7% qoq to 14,075 tonnes during the quarter.
Exhibit 3: Zinc metal sales volume higher
180,000 4,000
3,500
150,000
3,000
120,000
2,500
(US $/tonne)
(tonnes)
90,000 2,000
1,500
60,000
1,000
30,000
500
0 0
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
Volume (LHS) Realisation (RHS)
Source: Company, Angel Research
Exhibit 4: Lower lead metal sales volume
25,000 4,000
3,500
20,000
3,000
2,500
(US $/tonne)
15,000
(tonnes)
2,000
10,000 1,500
1,000
5,000
500
0 0
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
Volume (LHS) Realisation (RHS)
Source: Company, Angel Research
However, higher zinc and lead realisations partially negated the negative impact of
lower production. Zinc and lead realisations increased by 34.3% yoy to US
$2,144/tonne and by 28.5% yoy to US $2,252/tonne, respectively.
In addition, saleable silver production increased by 25.9% yoy to 37,176 tonnes
(29,527 tonnes), while sales increased by 20.1% yoy to 35,830kg (29,838kg).
Average silver realisation increased by 39.2% yoy to US $617/kg (US $443/kg).
Thus, net revenue increased by 29.0% to Rs1,951cr.
July 23, 2010 3
4. Hindustan Zinc |1QFY2011 Result Update
Operating performance remains muted
EBITDA margins came in at 52.4%, lower than our estimate of 60.1% on account
of a) an increase of 46.3% yoy in stores and spares to Rs197cr, and b) 59.0% yoy
increase in mining and manufacturing expenses to Rs191cr. Staff costs also
increased by 84.0% yoy to Rs148cr due to additional gratuity provisions and full
impact of long-term wage settlement during the quarter. Consequently, EBITDA
came in at Rs1,022cr, higher by 30.6% yoy.
Exhibit 5: Margins expanded by only 65bp
1,800 80
1,500
60
1,200
(Rs cr)
900 40
(%)
600
20
300
0 0
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
EBITDA (LHS) EBITDA margins (RHS)
Source: Company, Angel Research
Despite EBITDA growing by 30.6% yoy, the company’s net profit grew by 23.9%
yoy to Rs891cr on account of lower other income, which declined by 12.1% yoy to
Rs158cr.
Exhibit 6: Net profit grew by 23.9%
1,500 80
1,200
60
900
(Rs cr)
40 (%)
600
20
300
0 0
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
Net profit (LHS) Net profit margins (RHS)
Source: Company, Angel Research
Expansion projects
The 100ktpa lead smelter at Rajpura Dariba is expected to be commissioned
by 2QFY2011E.
80MW captive power plant was commissioned in June 2010. The second
80MW power plant is expected to be commissioned by September 2010.
The Sindesar Khurd mine project is on schedule, with production expected to
commence from 2QFY2011.
July 23, 2010 4
5. Hindustan Zinc |1QFY2011 Result Update
Outlook
Zinc – Metal surplus at 418,000 tonnes
As per ILZSG, in CY2010E, global zinc usage is expected to grow at 11.3% to
12.1mn tonnes, whereas refined zinc production is expected to grow at 10.3% to
12.5mn tonnes. Hence, global zinc metal supply is likely to remain in surplus by
418,000 tonnes in CY2010E.
ILZSG expects zinc demand to grow in Europe and US by 21.6% and 5.6%,
respectively, while China’s zinc demand is expected to increase at 8.9% in
CY2010E.
Exhibit 7: Zinc prices and inventory
5,400 700,000
4,500 600,000
500,000
3,600
(US $/tonne)
400,000
(tonnes)
2,700
300,000
1,800
200,000
900 100,000
0 0
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10
Zinc prices (LHS) Inventory (RHS)
Source: Bloomberg, Angel Research
Lead – Metal surplus at 100,000 tonnes
As per ILZSG, lead metal is expected to remain in surplus by 100,000 tonnes in
CY2010E. Global lead usage is expected to grow at 7.3% yoy to 9.3mn tonnes.
ILZSG expects demand to recover in Europe and US by 3.2% and 2.8%,
respectively, while China’s lead demand is expected to grow at 9.1% in CY2010E.
Lead metal production is likely to grow 7.5% to 9.4mn tonnes, mainly driven by
the commissioning of new plants in Brazil and India.
Exhibit 8: Lead prices and inventory levels
4,500 250,000
3,600 200,000
(US $/tonne)
2,700 150,000
(tonnes)
1,800 100,000
900 50,000
0 0
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10
Lead prices (LHS) Inventory (RHS)
Source: Bloomberg, Angel Research
July 23, 2010 5
6. Hindustan Zinc |1QFY2011 Result Update
Valuation
At the CMP of Rs988, the stock is trading at 5.6x FY2011E and 3.5x FY2012E
EV/EBITDA. HZL is expected to benefit from the expansion of zinc-lead smelting
capacity and increased silver production along with 100% backward linkages. In
addition, HZL has a huge cash balance of Rs12,323cr at the end of the quarter
(Rs292 per share) and plans of Sterlite Group to buy out the remainder of the
government’s holding can provide a further upside. We maintain our Buy
recommendation on the stock, with a revised Target Price of Rs1,227 (earlier
Rs1,399), valuing the stock at 6x FY2012E EV/EBITDA.
Exhibit 9: Key assumptions
LME prices (US $/tonne) FY11E FY12E
Zinc 1,975 2,050
Lead 1,925 2,000
Silver (Rs/kg) 25,500 25,500
Sales volume (tonnes)
Zinc metal 682,100 747,150
Lead metal 80,100 125,450
Silver 180,000 270,000
Source: Angel Research
We have revised our FY2011 and FY2012 estimates to factor in lower zinc and
lead prices. We have also marginally tweaked our sales volume estimates and
other bookkeeping changes.
Exhibit 10: Change in estimates
(Rs cr) Earlier estimates Revised estimates Upgrade/(downgrade) (%)
FY11E FY12E FY11E FY12E FY11E FY12E
Net sales 9,764 12,884 8,515 10,559 (12.8) (18.0)
EBITDA 5,861 7,754 4,787 6,160 (18.3) (20.6)
EBITDA margin (%) 60.0 60.2 56.2 58.3 (381bp) (185bp)
PBT 6,329 8,580 5,097 6,585 (19.5) (23.2)
Net income 5,063 6,864 4,077 5,268 (19.5) (23.2)
Net margin (%) 51.9 53.3 47.9 49.9 (397bp) (338bp)
Diluted EPS (Rs) 119.8 162.4 96.5 124.7 (19.5) (23.2)
Source: Company, Angel Research
Exhibit 11: EPS - Angel forecast vs. consensus
Year (%) Angel forecast Bloomberg consensus Variation (%)
FY2011E 96.5 115.0 (16.1)
FY2012E 124.7 133.0 (6.3)
Source: Bloomberg, Angel Research
July 23, 2010 6
13. Hindustan Zinc |1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Hindustan Zinc
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 23, 2010 13
