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Fullerton Securities' Investment Idea - HINDUSTAN ZINC LIMITED - "BUY"


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Fullerton Securities' Investment Idea - HINDUSTAN ZINC LIMITED - "BUY"

  1. 1. October 15, 2010 HINDUSTAN ZINC LIMITED BUY Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Strong Buy Hindustan Zinc Limited (HZL) is an integrated mining and resources producer of zinc, lead, Buy and silver. It is a subsidiary of Vedanta Resources PLC and is the world’s largest fully Hold integrated Zinc producing company, with about 90% production share and around 80% Reduce market share in domestic market. It is also India’s leading Lead producer. Sell • One of the world’s lowest cost producers of Zinc and Lead owing to its captive mines and Strong Buy – Expected Returns > 20% p.a. Buy – Expected Returns from 10 to 20% p.a. power plants. Hold – Expected Returns from 0 % to 10% p.a. Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk • The company has exclusive mining rights and continuously increasing capacity, making it Sell – Returns < 0 % the only choice for its customer. This, combined with a significant cost advantage, strong sales realization helps HZL post robust growth in revenues. • HZL’s captive mines of zinc and lead ore are located in Rajasthan; with total reserves of 298.6 MT. The average Zinc content across mines stands at ~ 8.7%, one of the highest STOCK DATA BSE / NSE Code 500188 / HINDZINC globally. Bloomberg Code HZ IN EQUITY No. of Shares (Mn) 423 • HZL is focusing aggressively on increasing its silver production. It expects to become Asia’s Sensex / Nifty 20,688 / 6,234 largest and world’s sixth largest silver-producing company by 2013 PRICE DATA CMP Rs (13th Oct' 10) 1,221 • HZL is a debt free company and at the end of FY10 had a net cash balance of Rs. 118bn. Beta 1.25 Based on the consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for Market Cap (Rs mn) 516,102 52 Week High-low 1,325 / 830 the company works out to Rs. 1450 Average Daily Volume 48,840 STOCK RETURN (%) 30D 3M 6M 1Y Financial Snapshot Hindustan Zinc 11% 24% -1% 46% Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E Sensex 8% 15% 16% 22% Revenue 78,778 56,803 80,170 84,915 95,486 Nifty 8% 15% 17% 23% SHARE HOLDING PATTERN (%) Y-o-Y Growth % -28% 41% 6% 12% Promoter 65 EBIDTA 62,300 36,654 53,923 56,428 59,561 Institutional 30 Y-o-Y Growth % -41% 47% 5% 6% Non Institutional 6 PAT 43,961 27,276 40,414 43,786 45,907 Total 100.0 Y-o-Y Growth % -38% 48% 8% 5% 1 Year Price Performance (Rel. to Sensex) 60 EPS Rs 104 65 96 104 109 Sensex HZL 50 BVPS Rs 280 340 429 527 631 40 EBIDTA % 79% 65% 67% 66% 62% NPM % 56% 48% 50% 52% 48% 30 ROE % 37% 19% 22% 20% 17% 20 PER x 11.8 11.2 10 P/B Ratio 2.3 1.9 0 EV/EBIDTA 6.9 6.6 -10 -20 Page | 1
  2. 2. October 15, 2010 BUSINESS PROFILE Hindustan Zinc Ltd. (HZL) is world’s largest zinc-producing company. It has one of the largest mining assets in the world. The company is engaged in mining and refining ore to produce non-ferrous metals – zinc, lead and silver along with captive Rampura Agucha mine is an open cast mine and power generation. Its operations are fully-integrated from mining to production of metals. HZL have four mines and four has Zinc content of smelting operations. Mines are situated at Rampura Agucha, Sindesar Khurd, Rajpura Dariba and Zawar in the State of 13.4% and Lead content of 1.9%. Also open cast Rajasthan, while the smelters are located at Chanderiya, Debari and Dariba in the State of Rajasthan and Vizag in the State of mines have higher Andhra Pradesh. Its captive mines and thermal power plants give the company a significant cost advantage, making it one of recovery ratio and lower cost of extraction the lowest-cost producers of zinc in the world. HZL has the ability to charge high prices due to its exclusive mining rights and this has resulted in an excellent financial track record. HZL is well-poised to grow in the short-term, led by an uptick in global zinc demand due to the strong recovery in steel, construction, engineering & automotive industry. HZL is also focusing aggressively on increasing its silver production. It expects to become Asia’s largest and world’s sixth largest silver-producing company by 2013 with a total production of 5, 00,000 kg per annum. Currently the company produces 1, 00,000 kg of silver. HZL has undertaken expansion of its Sindesar Khurd mines in Rajasthan to augment its capacity. Currently, around 77% of India’s annual silver demand is met through imports. At present, Hindustan Zinc’s market share in the domestic market is 2.5%. Post-expansion of the capacity, it is likely to be Asia’s largest primary silver producer. Zinc is used in many sectors such as infrastructure, construction, consumer durables and automobiles. Lead is mainly used in battery sector. 3000 Historical Zinc & Lead LME prices 3000 Refined Production Breakup (tpa) 1,200,000 2500 2500 1,000,000 2000 2000 800,000 1500 1500 600,000 1000 1000 400,000 500 500 200,000 0 0 0 2008A 2009A 2010A H2SO4 Zinc Silver Lead Lead (USD/Tonne) Zinc (USD/Tonne) Key risk and concerns… Lower than expected HZL revenues are directly linked with the global market for zinc and lead which are priced with reference to LME prices. Zinc/ Lead prices on the Adverse fluctuation in prices of these commodities could have a significant impact on financial performance.HZL is thus back of reduced demand globally could result in exposed to commodity price risks and exchange rate fluctuations both of which are highly volatile in nature. Further lower profitability increase in royalty rates by GOI could negatively affect profitability. Metals and mining is an environmental sensitive industry and hence any change in policy could affect the company’s production. Being a cyclical industry, delay in capacity expansion plan would negatively affect the company. Page | 2
  3. 3. October 15, 2010 BUSINESS PERFORMANCE Steady performance... With higher Zinc and lead prices on Y-o-Y basis, the revenue of Hindustan Zinc for Q1 FY11 grew 29% Y-o-Y to Rs Zinc and Lead operations contributes about 99% of 19,730mn. During the quarter, the average zinc and lead prices at LME stood at USD 2,018 per tonne and USD 1,944 the total revenue and rest per tonne, up 37% and 29% Y-o-Y respectively. The zinc volume during Q1 FY11 was up 18% Y-o-Y to about 164,500 by merchant power sale tonne while lead was down 13% to 15,300 tonne. On Q-o-Q basis the revenue was down 22% due to lower zinc and lead prices at LME (each lower by 12% on Q-o-Q) and lower silver sales. The OPM was up by 60 bps Y-o-Y to 51.8%. Exploration Ongoing exploration activities by HZL have yielded significant success with the gross addition of 33.7 million tonnes to reserves and resources prior to a depletion of 7.1 million tonnes in FY 2010. Contained zinc-lead metal has increased by 3.4 million tonnes, prior to a depletion of 0.8 million tonnes during the same period. Total reserves and resources at 31 March 2010 were 298.6 million tonnes containing 34.1 million tonnes of zinc-lead metal. The success of exploration efforts has been primarily in the Sindesar Khurd and Rajpura Dariba belt where there is a combined reserve and resource base of 103.03 million tonnes (FY 2009: 83.4 million tonnes).The Company has been successful in its exploration efforts with the addition of 185.8 million tonnes of reserves and resources in the period of April 2004 to March 2010, including depletion of 33.4 million tonnes. The 210,000 TPA Hydro Zinc Smelter at Rajpura Dariba commissioned in Q4 FY10 is ramping up well and contributed 33,000 tonne in Q1 FY11. Construction activity at the 100,000 TPA lead smelter at Rajpura Dariba is progressing as planned, and is on schedule for completion by Q2 FY2011. Of the 160MW captive power plant, is expected to be synchronized in September 2010. Development activity at Sindesar Khurd mine project is on schedule, with production expected to commence from Q2 FY 2011. Quarterly Performance Revenue, EBIDTA & PAT margins 30,000 70% 120,000 140% 25,000 60% 100,000 120% 50% 100% 20,000 80,000 40% 80% 15,000 60,000 30% 60% 10,000 40,000 20% 40% 5,000 10% 20,000 20% 0 0% - 0% Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 FY09A FY10A FY11E FY12E Revenue (Rs mn) EBITDA Margins Revenue (Rs Mn) EBIDTA Margin PAT Margin Peer Comparison HZL should command a Since HZL is purely into production of Zinc and Lead and being a market leader there is no company as peers for target valuation of 7.5× comparative valuation. With increasing commodity prices, jump in volume and high realization rate, the company is EV/EBIDTA due to healthier balance sheet and net cash set to register higher profitability and improved return ratios. It is more appropriate to value the stock on an of Rs. 393/share in FY12E EV/EBIDTA basis due to high level of cash on books and also due to cyclical nature of commodity prices. However, the company should command a target multiple of 7.5 EV/EBIDTA times due to healthier balance sheet and net cash. Page | 3
  4. 4. October 15, 2010 VALUATION Future Outlook: India’s per capita consumption of zinc is currently ~0.3kgs as compared to China’s 1.9 kgs, Based on a consolidated FY12 EV/EBIDTA multiple of Japan’s 5.5 kgs and North America’s 3.4 kgs per annum. With growth in infrastructure, construction, consumer 7.5, the fair value for the durables and automobiles there exists an immense opportunity domestically. 37 Infrastructure projects worth Rs company works out to Rs 70,000 Crore have already been approved by the Indian Government including various projects for Railway 1450 Electrification, Ports, Airports, power projects etc. In the long-term, we see a promising future for Zinc demand in India. As is typical of all developing economies, the growth rate of metal consumption in India is expected to be 1.5 times the GDP growth rate. We expect HZL’s revenues to grow at a CAGR of 9% over FY2010-12 to Rs 95,486mn by FY2012. We further estimate that the PAT would grow at a CAGR of 7% over FY2010-12 to Rs 45,907mn in FY2012 from Rs 40,414mn in FY2010. Based on a consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for the company works out to Rs 1450 We recommend a ‘Buy’ rating on the stock. Financial Analysis and Projections Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E Net Revenue 78,778 56,803 80,170 84,915 95,486 Other Income 8,516 9,312 7,222 8,759 9,468 Total Income 87,294 66,115 87,392 93,674 104,953 Operating Expenditure 24,994 29,461 33,469 37,246 45,393 Depreciation 2,205 2,853 3,343 3,626 4,251 EBIT 60,095 33,801 50,580 52,803 55,310 EBIT Margin (%) 76% 60% 63% 62% 58% Interest Expenses 242 219 439 48 0 Profit Before Tax 59,853 33,582 50,141 52,754 55,310 Less: Tax 15,893 6,306 9,727 8,968 9,403 Profit After Tax 43,961 27,276 40,414 43,786 45,907 PAT Margin (%) 56% 48% 50% 52% 48% ROE (%) 37% 19% 22% 20% 17% EPS (Rs) 104 65 96 104 109 BVPS (Rs) 280 340 429 527 631 Valuation Ratios (x) FY11E FY12E EV/EBIDTA 6.92 6.55 PER x 11.8 11.2 P/B Ratio 2.3 1.9 Page | 4
  5. 5. October 15, 2010 Board Of Directors Director Name Current Position Description Shri. Agnivesh Agarwal is Non-Executive Chairman of the Board of Hindustan Zinc Limited since 15 November 2005. Mr. Agarwal is an eminent industrialist with a knowledge of business operations, has a experience in managing projects, business Non-Executive Chairman of the restructuring and strategy. Over the years he has developed an excellent commercial knowledge with hands on experience. He Agnivesh Agrawal Board is also the Director of Madras Aluminium Company Limited, Sterlite Iron and Steel Company Limited, Sterlite Infrastructure Pvt. Limited, Agarwal Galvanizing Pvt. Limited, and Sterlite Infrastructure Holdings Pvt. Limited. Mr. Agarwal has completed his graduation in commerce from Sydenam College, Mumbai. Shri. Akhilesh Joshi is Chief Operating Officer and Whole Time Director of Hindustan Zinc Limited since 21 October 2008. He joined the company in 1976. Prior to becoming COO of Hindustan Zinc, he was senior vice president (Mines), responsible for the Chief Operating Officer, Whole overall operations at all mining units. Mr Joshi has a mining engineering degree from MBM Engineering College, Jodhpur and Akhilesh Joshi Time Director post graduate diploma in economic evaluation of mining projects from School of Mines of Paris. He also has a first class mine manager certificate of competency. He is the recipient of National Mineral Award (GOI) in 2006 for his contribution in the field of mining technology. Shri. Navin Agarwal is Non-Executive Director of Hindustan Zinc Limited since 11 April 2002. Mr Navin Agarwal is Deputy Executive Chairman of Vedanta Resources Plc and was appointed to the company's Board of Directors on 11 April 2002. He is also the Chairman of Konkola Copper Mines and the Madras Aluminium Co Ltd, Executive Vice Chairman of Sterlite Industries ( India ) Ltd and Director of Vedanta Aluminium Limited, Sterlite Iron and Steel Company Limited, Sterlite Infrastructure Private Limited, Navin Agrawal Non-Executive Director Sterlite Infrastructure Holdings Private Limited, Vedanta Resources Holdings Limited, Vedanta Resources Investment Limited and Bharat Aluminium Company limited. Mr Agarwal has over 20 years of experience in strategic and operational management. He has been the driver behind the company's growth. He holds a Bachelor of Commerce degree from Sydenham College, Mumbai, and has also completed the Owner/ President Management Program at Harvard University. Smt. Ajita Bajpai Pande is Independent Director - Nominee of Government of India for Hindustan Zinc Limited since 24 October Independent Director - Nominee Ajita Pande 2005. Ms. Pande is an IAS (Indian Administrative Service) Officer and is presently holding the post of Joint Secretary, Ministry of of Government of India Mines, New Delhi. She is also the Director of Hindustan Copper Ltd, Hindustan Diamond Co. Ltd. and BALCO. Shri. Sanjiv Kumar Mittal is Independent Director - Nominee of Government of India for Hindustan Zinc Limited since 28 March Independent Director - Nominee 2007. Mr Mittal is an IAS (Indian Administrative Service) officer and presently holding the post of Joint secretary and Financial Sanjiv Mittal of Government of India Advisor, Government of India, Ministry of Mines, New Delhi. He is also the Director of BALCO, Hindustan Copper Ltd and Coal India Ltd. Shri. A. R. Narayanaswamy is Independent Director of Hindustan Zinc Limited since 30 March 2009. He is a member of The A. Institute of Chartered Accountants of India and has experience in the industry. He is also on the Board of Madras Aluminium Independent Director Narayanaswamy Company Limited and Sterlite Technology Limited, IBIS Softec Solutions (P) Ltd, IBIS Logistics (P) Ltd and IBIS Systems & Solutions (P) Ltd. Page | 5