Hold Hindustan Zinc; target of Rs 186: Arihant

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Arihant capital markets research report on Hindustan Zinc“Hindustan Zinc’s (HZL) 2QFY15 performance was better than expected largely due to strong LME prices (11.4% rise sequentially). HZL reported 4% yoy decline in mined metal production (213kt) due to higher excavation of waste as company is in transition phase towards underground mining. However, higher production is planned in H2FY15. Integrated refined metal production of zinc-lead during the quarter was lower by ~10.7% YoY, in-line with mined metal production. Lower production volumes, planned shutdowns, increased employee expense on account of long‐term wage agreement and higher mine development expenses impacted cost of production of zinc which went up from Rs 50,522($ 816) per ton to Rs 55,154($ 910) per ton. However, it was lower than previous quarter’s Rs 60,093($ 1,005). On blended basis total operating cost was 15.7% higher at Rs. 85,442 per tonne on YoY basis. An EBITDA margin was marginally lower by 30bps to 52.6% on YoY basis. Profit after tax came in at Rs 2,184cr and was higher by 29.9% on YoY basis. The increase is largely on account of higher LME prices. During the quarter, environmental clearance was received for enhancement of production capacity of Kayad mine from 0.35 MTPA to 1.0 MTPA.” “Volumes for Zinc and lead for HZL are expected to remain flat over next couple of years as we expect mining ramp up to happen gradually. We will be watchful of ramp up at RA mine and any delay in the same will act as a negative trigger for the stock. Nonetheless, our positive thesis on HZL is based on positive outlook on Zinc prices corroborated by falling surplus in the market. We have valued stock on EV/EBITDA of 6x its FY16E and have arrived at fair value of Rs 186 per share. At CMP of Rs 171 the stock is trading at FY15E and FY16E EV/EBITDA of 5.5x and 5.3x. We recommend Hold rating on the stock,” says Arihant capital markets research report.

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