Please refer to important disclosures at the end of this report 1 Particulars (Rs cr) 1QFY2011 1QFY2010 % chg (yoy) 4QFY2010 % chg (qoq) Net sales 1,951 1,512 29.0 2,498 (21.9) EBITDA 1,022 782 30.6 1,548 (34.0) EBITDA margin (%) 52.4 51.7 65bp 62.0 (959bp) Net profit 891 719 23.9 1,239 (28.1) Source: Company, Angel Research 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 estimates of Rs1,158cr. Earnings not impressive: HZL’s net revenue grew by 29% yoy to Rs1,951cr and 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 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 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) consumption of stores and spares and c) staff costs (additional gratuity provisions and impact of wage settlement). Consequently, EBITDA came in at Rs1,022cr, higher by 30.6% yoy, and net profit increased by 23.9% yoy to Rs891cr. 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 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. 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 P/BV (x) 2.9 2.3 1.9 1.6 RoE (%) 20.8 24.9 20.4 21.6 RoCE (%) 18.0 25.6 20.7 22.3 EV/Sales (x) 5.7 3.7 3.2 2.0 EV/EBITDA (x) 11.7 6.4 5.6 3.5 Source: Company, Angel Research BUY CMP Rs988 Target Price Rs1,227 Investment Period 12 months Stock Info Sector Bloomberg Code HZ@IN Shareholding Pattern (%) Promoters 64.9 MF / Banks / Indian Fls 31.0 FII / NRIs / OCBs 1.9 Indian Public / Others 2.1 Abs. (%) 3m 1yr 3yr Sensex 2.5 19.0 15.2 Hindustan Zinc (18.8) 44.2 26.3 10 18,131 5,449 HZNC.BO 41,744 1.2 1,325/652 52938 Base Metals Avg. Daily Volume Market Cap (Rs cr) Beta 52 Week High / Low Face Value (Rs) BSE Sensex Nifty Reuters Code Paresh Jain Tel: 022-40403800 Ext: 348 [email protected]Pooja Jain Tel: 022-40403800 Ext: 311 [email protected]Hindustan Zinc Performance Highlights 1QFY2011 Result Update | Base Metals July 23, 2010
Transcript
Please refer to important disclosures at the end of this report 1
Particulars (Rs cr)
1QFY2011 1QFY2010 % chg
(yoy) 4QFY2010
% chg (qoq)
Net sales 1,951 1,512 29.0 2,498 (21.9)
EBITDA 1,022 782 30.6 1,548 (34.0)
EBITDA margin (%) 52.4 51.7 65bp 62.0 (959bp)
Net profit 891 719 23.9 1,239 (28.1)
Source: Company, Angel Research
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 estimates of Rs1,158cr.
Earnings not impressive: HZL’s net revenue grew by 29% yoy to Rs1,951cr and 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 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 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) consumption of stores and spares and c) staff costs (additional gratuity provisions and impact of wage settlement). Consequently, EBITDA came in at Rs1,022cr, higher by 30.6% yoy, and net profit increased by 23.9% yoy to Rs891cr.
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 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 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.
Hindustan Zinc |1QFY2011 Result Update
July 23, 2010 3
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
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
30,000
60,000
90,000
120,000
150,000
180,000
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
(US
$/t
onne
)
(tonn
es)
Volume (LHS) Realisation (RHS)
Source: Company, Angel Research
Exhibit 4: Lower lead metal sales volume
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
5,000
10,000
15,000
20,000
25,000
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11(U
S $
/ton
ne)
(tonn
es)
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.
Hindustan Zinc |1QFY2011 Result Update
July 23, 2010 4
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
0
20
40
60
80
0
300
600
900
1,200
1,500
1,800
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
(%)
(Rs
cr)
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%
0
20
40
60
80
0
300
600
900
1,200
1,500
1QFY08 4QFY08 3QFY09 2QFY10 1QFY11
(%)
(Rs
cr)
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.
Hindustan Zinc |1QFY2011 Result Update
July 23, 2010 5
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
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
0
900
1,800
2,700
3,600
4,500
5,400
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10
(tonn
es)
(US
$/to
nne)
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
0
50,000
100,000
150,000
200,000
250,000
0
900
1,800
2,700
3,600
4,500
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10
(tonn
es)
(US
$/to
nne)
Lead prices (LHS) Inventory (RHS)
Source: Bloomberg, Angel Research
Hindustan Zinc |1QFY2011 Result Update
July 23, 2010 6
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.
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.
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%)
Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.
Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly.
Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information.
Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.
