Hindustan Zinc: Earnings visibility improves

Most analysts polled by Bloomberg have BUY rating on the stock with a consensus target price for the stock at Rs 147.72.

Hindustan Zinc (HZL) has slipped over 27% from its 52-week high of Rs 146.80 on 18 December 2012 to touch its 52-week low of Rs 106.90 on 17th April 2013. While on one hand the outlook of zinc and lead prices was one of the factors that saw the stock correct, the proposed stake sale by the government and a sharp decline in silver prices also contributed to the slide.

The stock, however, has bounced back since then and the company’s performance in the fourth quarter ended March 2013 should allay some fears on the decline in earnings.

A rise in volume and low cost of production has helped the company report a turnaround performance despite the fall seen in silver. The profit came in 53.3% higher at Rs 2,181.78 crore during the fourth quarter ended March 2013.

Higher production

The company saw its silver production, which is a high margin product (EBDITA margin around 95%), in the quarter rise to 100 tonnes, as compared to 62 tonnes in the previous quarter. Zinc production, too, rose to 181 kilo tonnes (kt) in the recently concluded quarter from 168 kt seen in the three months ended December 2012. EBIDTA margin at 54.1% during the quarter were much higher than 47% during December 2012 quarter and 52.9% during March 2012 quarter.

In FY13, Hindustan Zinc increased its reserve base by 16 million tonnes (MT) to 348 MT, implying a mine life of 25-30 years, as per analysts estimates. The company has guided for 15% growth in mined metal production in FY14 at 1 MT on the back of increased production in Zawar, SK and Kayar mines. The integrated saleable silver production (net of own consumption) is expected to grow 25% y-o-y at around 360 tonnes.

"The company has delivered on its guidance of a pickup in volume and cost optimization in Q4FY13, and we expect HZ to continue to see a similar trend in FY14F. At the same time, we believe that globally zinc fundamentals have improved and expect zinc to see a balanced demand supply scenario. We expect zinc prices to improve from the current level of $1,900/tonne to $2,000-2,100/tonne in FY14-15F," notes Alok Kumar Nemani, an analyst at Nomura in his 26 April report.

Outlook

Given these developments, the fear of a decline in earnings has been put to rest. While Bhavesh Chauhan at Angel Broking expects flat earnings for the company in FY14 and an improvement in FY15, others such as Girirraj Daga at Nirmal Bang sees the earnings increasing 4% in FY14.

Notes Ashish Kejriwal at Elara Capital: “Due to low production costs (excluding royalty <$1,000/tonne) and debt-free status (net cash of Rs 51/share at FY13-end), HZL will continue to register profits even in the worst of zinc cycles. HZL continues to make return-on-equity (RoE) of 20% and is available at a cheap valuation of 3.7X FY14E EV/EBITDA.”

Along with stable earnings in a soft commodity price scenario, analysts at Nomura believe a potential stake sale of 29.5% government stake to Sterlite Industries could be a trigger for the stock.

Most analysts (41 out of 49) polled by Bloomberg have BUY rating on the stock with a consensus target price for the stock at Rs 147.72. Analysts at Ctigroup have a Neutral rating on the stock with a target price of Rs 132 for the stock, which is currently trading at Rs 118 levels.