Silver lining for Hindustan Zinc

Improving outlook for zinc, increasing volumes at its plants positives for the company

Even as base metal prices remain weak, putting pressure on non-ferrous stocks, the Street is bullish on Hindustan Zinc. The stock, which saw lows in August due to weak sentiments and falling zinc prices, has rebounded. While zinc prices remain weak, the premiums have stabilised. Premium represents the extra price over benchmark rate prevailing in the market that a buyer of the metal pays. Analysts at Elara have said although base metals at London Metal Exchange continued to fall, regional premium on zinc and aluminium remain firm.

According to international lead zinc study group ILZSG, the global zinc demand-supply was balanced in the September 2015 quarter with world metal production and demand of 3.5 million tonnes each. The closures of large zinc mines including Century, Lisheen and Glencore in the December 2015 quarter will likely curtail supplies, say analysts at Kotak Institutional Equities. They expect the zinc market to be in deficit of 230,000 tonnes in calendar year 2016 compared to a surplus of 235,000 tonne in 2015 due to a three per cent fall in global zinc production. They also highlight that unlike aluminium, global inventories of zinc are not high at 1.5-2 million tonnes, which is equivalent to 50-60 days of consumption.

According to Elara, zinc fundamentals remain strong given production cut backs announced by Glencore as-well-as by Chinese producers (500,000 tonnes each). This represents seven per cent of world consumption. Although there are news reports suggesting there will be probes by China on short-selling, metal prices will also be influenced by the outcome of Fed rate hike decision in the near term. The cost of production will play a vital role in determining how low can prices go from here on. Analysts at Elara believe cost support expect prices to inch up. They suggest a trading opportunity in select non-ferrous companies on account of company-specific triggers as well as the possibility of a marginal uptick in base metal prices. They reiterate ‘buy’ on Hindustan Zinc.

Hindustan Zinc is benefiting from increasing volumes, too. During the September 2015 quarter, its integrated refined zinc metal production increased 21 per cent year-on-year to 211,000 tonnes. Higher volumes along with uptick in prices and lower costs should lead to visible gains for the company. The target price for the stock at Rs 177 (Motilal Oswal), Rs 180 (Kotak) and Rs 191 (Elara) indicates 21-31 per cent upside from current levels of Rs 146.