Hindustan Zinc shares up 13% in two weeks, rally likely to continue

Company's cost-saving measures and debt reduction expected to boost company's margin

Despite a weak secondary market, shares of Hindustan Zinc have rallied over 13 per cent in a fortnight to trade around Rs 476. The gains have come ahead of the Anil Agarwal-led firm’s December quarter results on Tuesday.

 

So, what is underpinning the gains in the country’s largest integrated zinc producer and is there more steam left in this high dividend-yielding stock? Ventura believes Hindustan Zinc Ltd (HZL) shares could climb as much as Rs 585 in two years.

 

The domestic brokerage believes the company’s cost-saving measures and debt reduction will boost margin expansion.

 

“Due to power cost saving measures and operating leverage, ebitda (operating profit) and PAT (net profit) are expected to reach Rs 19,142 crore and Rs 11,402 crore by FY27, respectively. Consequently, ebitda and PAT margins are expected to improve to 51.5 per cent (up 430 basis points) and 30.7 per cent (up 350 bps) by FY27. Return on equity (ROE) is expected to dip by 550 bps to 45.6 per cent, while the return on invested capital is expected to increase by 2,960 bps to reach 102.4 per cent respectively,” said Ventura while initiating coverage on the stock.

 

HZL earns revenue by selling zinc, lead, silver, sulphuric acid and wind power. The Vedanta-promoted firm has five operational mines in Rajasthan and is developing another.

 

India is a net exporter of zinc, while the global demand for base metals such as zinc and lead is projected to grow at an annualised rate of over 6 per cent. This bodes well for HZL, said Ventura.

 

“HZL is expected to expand its mined production to 1.2 million tonnes in FY27 from 1 million tonnes…We expect revenue to grow at a CAGR (compound annual growth rate) of 9 per cent to Rs 37,152 crore during FY24-27E (estimated) aided by capacity expansion and a strong demand outlook,” the brokerage has said in a note dated January 23.

 

Furthermore, Ventura expects HZL to turn net debt free by FY26 and “have a net cash of Rs 12,500 crore by FY27 helping fuel its expansion plans".

 

HZL has planned capex of Rs 16,000 crore for the period FY24-27 for funding a roaster plant in Rajasthan’s Debari, fumer and fertiliser plant at Chanderiya (sulphuric acid forward integration in Rajasthan) and 450 megawatt renewable energy addition.

 

At the target price of Rs 585, HZL is valued at 9.6x its estimated EV/EBITDA for FY27. HZL has a dividend yield of over 6 per cent.