Hindustan Zinc NEUTRAL. Performance Highlights. 1QFY2010 Result Update

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1 1QFY21 Result Update NEUTRAL Price Rs685 Target Price - Investment Period - Stock Info Sector Market Cap (Rs cr) 28,95 Beta.7 52 WK High / Low 71/215 Avg. Daily Volume 6966 Face Value (Rs) 1 BSE Sensex 15,231 Nifty 4,524 BSE Code 5188 NSE Code HINDZINC Reuters Code HZNC.BO Bloomberg Code HZ@IN Shareholding Pattern (%) Promoters 64.9 Govt/Banks/Indian FIs 32.2 FII/ NRIs/ OCBs 1.6 Indian Public/others 1.3 Abs. 3m 1yr 3yr Sensex (%) HZL (%) Pawan Burde Tel: Ext: pawan.burde@angeltrade.com Laxmikant Waghmare Performance Highlights Top-line exceeds estimates aided by higher Volumes, Rupee depreciation: Hindustan Zinc (HZL) posted a marginal 8% fall in Top-line to Rs1,512r (Rs1,644cr) for 1QFY21, which was better than our estimates. Top-line de-grew primarily on account of the steep fall in LME zinc and lead prices and lower realisations of bye-products. The LME zinc and lead prices averaged at US $1,476/tonne and US $1,56/tonne, lower by 3.2% and 35% yoy respectively, during the quarter. However, Rupee depreciation of 17% helped the company achieve better realisations and hence the fall in zinc and lead realisations was lower compared to the fall in average LME prices. Notably, zinc and lead realisations fell 13.8% and 19.9% respectively, compared to the 3.2% and 35% fall in zinc and lead prices, respectively. Sales volume of refined zinc, silver and sulphuric acid, which grew 9%, 46% and 13.6% respectively, during the quarter also restricted the fall in Revenues. Also, the company sold zinc concentrate of 36,191tonnes during the quarter, which aided Top-line growth. Margins decline albeit ahead of estimates On the Operating front, HZL reported a decline in Margins by 87bp to 5.8% (59.5%) mainly due to the sharp fall in realisations owing to the sharp decline in LME zinc and lead prices. However, EBIDTA Margins exceeded our estimates on the back of better-than-expected realisations for zinc and lead and cost improvements. Royalty and Employee costs fell 1% and 5%, respectively. Bottom-line much ahead of estimates: HZL s Net Profit fell 15.2%, though it came in higher than our estimates due to cost improvements, to Rs719cr (Rs848cr) during the quarter. Net Profit de-grew on account of Margin erosion. Lower Interest costs and Low Tax provisioning helped arrest the fall in Net Profit. Key Financials Y/E March ( Rs cr) FY28 FY29 FY21E FY211E Net Sales 7,878 5,68 6,73 7,12 % chg (8.) (27.9) Net Profit 4,396 2,728 2,983 3,122 % chg (1.) (38.) FDEPS (Rs) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Tel: Ext: laxmikant.w@angeltrade.com July 23, 29 1

2 Volume growth, Rupee depreciation emerge saviours Hindustan Zinc HZL registered 9% growth in zinc sales volumes to 1,38,15 tonnes during the quarter mainly on the back of expansion of its zinc smelting capacity by 88,tpa, which was completed in April 28. Silver and sulphuric acid volumes also grew 45.8% and 13.6%, respectively. Rupee depreciation of around 17% yoy during the quarter however, supported the company s domestic realisations. Exhibit 1: Sales Volumes, Realisations Trend KT Rs'/tonne QFY29 2QFY29 3QFY29 4QFY29 1QFY21 Zinc Sales volume (LHS) Lead Sales volume (LHS) Zinc Realization (RHS) Lead Realization (RHS) Capacity expansions on schedule As part of the 1.6mtpa expansions, construction activities at the company s 2,1,tpa zinc smelter and 1,,tpa lead smelter at Rajpura Dariba is progressing well and is on schedule for completion by mid-21. Work at the mining projects at Rampura Agucha, Sindesar Khurd and Kayar are also progressing on schedule for progressive commissioning from mid-21. In line with the group's philosophy of being a fully self-reliant producer of power, a captive thermal power plant (CPP) with a capacity of 16MW will also be set up at Rajpura Dariba, taking its total power capacity to 518.2MW by 21. On expanded power capacity, HZL will be able to source 9% of its power requirements from the CPP. To support the increased smelting capacities, HZL will also increase its ore production capacity at the Rampura Agucha mine from 5mtpa to 6mtpa. Ore production at the Sindesar Khurd mine, the new mine in HZL's mining portfolio, will also be increased from.3mtpa to 1.5mtpa. HZL will also start mining activity at the Kayar mine, which will have production capacity of.3mtpa. The zinc and lead smelters, the 16MW CPP and Rampura Agucha mine expansion will be completed by mid-21. However, expansions at Sindesar Khurd and Kayar mines will be completed in phases by early 212. Exhibit 2: Capacity ramp up ' tonnes 1, FY26 FY27 FY28 FY29 FY21E FY211E Zinc Capacity Lead Capacity July 23, 29 2

3 Upgrade Zinc and Lead price estimates Hindustan Zinc LME zinc and lead prices have rebounded by almost 55% and 7% respectively, and are currently hovering at US $1,65 and US $1,68 from their lows of US $1,7 and US $983 during February 29, respectively. The significant rally in the LME prices was mainly driven by huge production cuts announced by several players worldwide since they were making losses at lower prices. Also, heavy buying from Chinese SRB led to drawdown of stocks and helped prices to recover. However, we believe that the LME prices are unlikely to move up significantly from current levels due to weak fundamentals and higher inventory at LME. However, the current LME zinc and lead prices are 28% and 3% higher than our estimate of US $1,3/tonne, respectively. Also, this far in FY21E, LME zinc and lead prices have averaged higher by 14.9% and 18.1% compared to our estimates, respectively. Hence, we upgrade our average zinc and lead price estimates by 11.5% and 13.5% to US $1,45 and US $1,475 respectively, for FY21E. We have also upgraded our FY211 price estimates to US $1,55 for both zinc and lead from the earlier US $1,4. Exhibit 3: Zinc Lead price variations YTD FY21 Our assumption (FY21) Variation (%) 1QFY29 Variations (%) Zinc 1,494 1, , Lead 1,535 1, , Outlook and Valuation We upgrade our FY21E and FY211E EPS estimates by 9.9% and 9.2% on account of the upward revision in zinc and lead prices and better-than-expected refined zinc and silver sales volumes. At Rs685, HZL is trading at a P/E of 9.7x and 9.3x and EV/EBIDTA of 5.9x and 4.1x on FY21E and FY211E estimates, respectively. The LME zinc and lead prices rebounded significantly from their lows during February 29. The rally in the prices was driven by the huge production cuts globally and heavy buying from China. However, post this rally in prices, roll back of production cuts is expected and with the high inventory at LME, prices are unlikely to move up significantly. We believe that the stock s current valuation captures the recent rally in the zinc prices. On account of the weak zinc outlook going forward due to the expected surplus of zinc over the next two years, we remain Neutral on the stock. July 23, 29 3

4 Exhibit 4: 1QFY21 Performance Y/E March (Rs cr) 1QFY21 1QFY29 % chg FY29 FY28 % chg Net Sales 1,512 1,644 (8.) 5,68 7,878 (27.9) Mining & Manf exp ,96 1, (% of Net Sales) Royalty (9.9) (28.7) (% of Net Sales) Staff Costs (4.9) (% of Net Sales) Admin & Selling (2.9) (2.4) (% of Net Sales) Total Expenditure ,946 2, Operating Profit (21.5) 2,734 5,38 (49.2) OPM (%) Interest (53.4) (9.5) Depreciation Other Income (7.1) Profit before Tax (2.4) 3,358 5,985 (43.9) (% of Net Sales) Current Tax (37.2) 631 1,589 (6.3) (% of PBT) Profit after Tax (15.2) 2,782 4,396 (38.) PAT Margin (%) EPS (Rs) (15.2) (38.) July 23, 29 4

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