Hindustan Zinc Research Report

Date of report May 30, 2017
Target Price (Rs) 300
Gain (%) 25

Hindustan Zinc Research Report

According to preliminary data recently compiled by ILZSG, the global market for refined zinc metal was in deficit by 6 KT over the first quarter of 2017 (against the surplus of 3 KT in Q1CY16) with total reported inventories declining by 18 KT over the same period. Refined zinc metal production during the quarter was at 3406 KT against metal usage of 3412 KT, implying the aforementioned deficit. In April 2017, the ILZSG forecast for CY17 suggests the deficit in refined zinc metal market is likely to increase to ~226 KT compared to a deficit of 196 KT in CY16. For CY17, ILZSG has forecast zinc metal production at 14076 KT while zinc metal usage is forecast at 14302 KT. The refined zinc market has been in deficit in three out of the last five years (CY13, CY14 and CY16). In the past, zinc deficit has augured well for global zinc prices.

HZL reports healthy growth in zinc, lead volume in April 2017…

During April 2017, HZL’s zinc production came in at 66197 tonnes (provisional), up ~87% YoY from 35384 tonne (provisional) in April 2016. Lead production during the month came in at 13929 tonne (provisional), up ~63% YoY. In FY18, mined metal production is expected to be higher than FY17. The management has guided refined zinc-lead production of ~950 KT (evenly spread through the year) while silver production will be over ~500 MT.

Huge reserve base, low cost of operations…

The company has a huge reserve base, which provides strong earnings visibility. The total reserve and resource (R&R) as on March 31, 2017 was at 404.4 MT containing 36.09 MT of zinc-lead metal and 1032 million ounce (Moz) of silver. The overall mine life continues to be 25+ years. Furthermore, HZL’s smelting assets are in the lowest quartile on the global cost curve. The low cost advantage is attributable to its fully integrated nature of operations involving mines, smelter and captive power source. The smelters lie within the proximity of mines resulting in low transportation and shifting costs.

Stable business model, robust balance sheet; reiterate BUY…

HZL’s integrated business model ensures steady cash flows, which reiterates our positive stance on the company. Among all major base metals, zinc is the best placed backed by healthy fundamentals. We expect the topline and EBITDA to clock a CAGR of 14% and 16%, respectively, in FY17-19E. The stock is currently trading at an attractive valuation of 5.1x FY19E EV/EBITDA. We value the stock at 7x FY19E EV/EBITDA and arrive at a target price of Rs 300. We have a BUY recommendation on the stock. HZL has a strong balance sheet, healthy cash flow, lower CoP, net cash status and healthy dividend yield, auguring well for the company.

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