Hindustan Zinc Ltd Metals & Mining

Transcription

1 Hindustan Zinc Ltd Metals & Mining Initiating Coverage 17 th October, 211 CMP-` Buy TP-`159 Market Data* Bloomberg Code HZ IN Reuters Code HZNC.BO Sensex/Nifty / Dividend Yield (%) Week High/Low 155.3/18.6 Equity Capital(` mn) Face Value (`) 2 Market Cap (` mn) Avg.1 day NSE Vol Source: Ace Equity, R K Global Research, *as on 16 Oct Investment Rationale Silver s contribution towards top line to grow from 6% to 16%. HZL is focusing on increasing its silver production to become the Asia s largest and world sixth largest silver producing company by 213 with the total production of 5 tons/annum. It has commissioned 1.5mtpa concentrator at Silver-rich Sindesar Khurd mine in the last quarter of FY11 where silver occurrences are at levels of 18 ppm (parts per metre). It is expected that topline business from the silver business grow from `543mn in FY 11 to `21169mn in FY13 and its total contribution to the HZL business will enhance from current 6% to ~16% by FY13E. Key Market Ratio* Latest TTM EPS (`) 13.3 Book Value (`) TTM PE (x) 9.3 TTM PBV (x) 2.7 EV/TTM EBITDA (x) 6.9 EV/TTM Sales (x) 4.9 Market Cap/TTM sales (x) 4.61 Source: Ace Equity, R K Global Research, *as on 16 Oct Share-Holding Pattern (%)* 3% Promoters Public FIIs Others 1% 31% 65% Profitability to remain strong, expect EPS to grow at `14 and `16 in FY12 and FY13 respectively: HZL has maintained average PBITDM of ~53% from last 3 years and we expect that margins will grow at an average rate of 63% in next two years with improvement in utilization rate to 81%-87% from 73% in FY11 coupled with operational efficiency, low tax rate, higher ROI. We are also positive on the prices of the metals which will move the profitability of the company. It is expected that the EPS will grow to `14 and `16 in FY12 and FY13 respectively from current `12 in FY11. Strong reported Balance: HZL has consistently generated strong cash flow which helped it to fund its capex plan from its internal accrual without raising debts. The company total cash reserve has increased by 25% in FY11 to `14965mn with `9332 in mutual funds and `5555mn in FD. Total cash balance of the company is expected to increase at CAGR of ~7.4% to `6534mn in FY13E from `56329mn in FY11. We expect that the operating cash flow of the company will further improve and will grow at CAGR of ~24% by FY13 to `73624mn from `47763mn in FY11 with the reduction in the interest cost on debt which stood at `439mn in FY1, came down by ~55% in FY11 to `194 as the company debt almost reduced to zero level in FY11. Source: Ace Equity, R K Global Research **as on 16 Oct HZL vs Sensex SENSEX HZL 2-Aug-1 2-Nov-1 2-Feb-11 2-May-11 2-Aug-11 Research Analyst: Sweety Singh sweety.singh@rkglobal.in Valuation: At current market price of `121.95, the stock is trading at EV/EBITDA of ~5.5x of its FY13E, EBITDA of `79732mn. We believe that the stock deserve premium as the company is largest producer of zinc and expected to gain from its silver business. We expect to see upside in the coming years with its strong fundamentals and zero debt with substantial cash reserves on its books. We initiate a BUY rating on the HZL stock with target price of ` 159, an upside potential of ~3%, using EV/EBITDA of 6.5x FY13E. Particulars E E Total Revenue (`in mn) EBITDA (`in mn) PAT (`in mn) EPS (`) EPS Growth (%) -38.% 79.7% 19.5% 15.7% BVPS (`) P/E (x) EV/EBITDA (x) ROE (%) 22.8% 22.6% 22.4% 21.6% *Computed based on CMP of ` R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 1

2 Hindustan Zinc Metals & Mining Company Background HZL is India's largest and world's second largest integrated producer of zinc & lead, with a global share of approximately 6% and domestic share of 8% in zinc. It produces Zinc, Refined Lead, Silver, Cadmium and Sulphuric acid. The core business comprises of mining and smelting of zinc and lead along with captive power generation. Company has four mines and four smelting operations: mines are situated at Rampura Agucha (largest zinc producing mine in the world), Sindesar Khurd, Rajpura Dariba and Zawar in Rajasthan; while the smelters are located at Chanderiya, Debari and in Rajasthan and Vizag in Andhra Pradesh. The company s current metal production capacity stood at 964Ktpa (879Ktpa of zinc and 85Ktpa of lead) whereas ore production capacity stands at 8.6Mtpa. HZL also owns 474MW coal based thermal captive power plant in Rajasthan for captive use and MW wind energy in Gujarat and Karnataka, which is sold to the respective state grids. In beginning of 211, Sterlite has completed the acquisition of Anglo American Skorpion Zinc assets through its subsidiary Sterlite Infra which will add 4, tons of metal to HZL s portfolio. It has successfully commissioned Hydro Zinc smelter in Dariba Smelting Complex, in March 1. Smelters (Ktpa) CPP (MW) WPP (MW) Chanderiya 61 Chanderiya 234 Samana 88.8 Debari 88 Zawar 8 Gadag 34.4 Vizag 56 Dariba 16 Mokal 35.7 Dariba 21 Gopalpura 12 Total Source: Company, R K Global Research HZL Mine Type of mine Capacity (mtpa) R & R (mt) Life Rampura Agucha Open Cast Sindesar Khurd Underground Rajpura Dariba Underground Zawar Underground Total Source: Company, R K Global Research Corporate Ownership Source: Company, R K Global Research R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 2

3 Hindustan Zinc Metals & Mining HZL Segment Wise Revenue FY (21) 4% 1% 4% 8% 11% Zinc Metal Lead Metal Zinc and Lead Concentrate 72% Silver Sulphuric Acid Others Source: Company, R k Global Research Production Data FY6 FY7 FY8 FY9 FY1 FY11 Mined Zinc (Kt) Mined Lead (Kt) ,364 77,724 83,82 85, Refined Zinc (Kt) Refined Lead (Kt) Refined Silver (kg) Source: Company,R K Global Research Milestone Achieved FY211- Commissioned 1.5mn ton per annum concentrator at Sindesar Khurd Mine Commissioned 16MW(8*2)CPP at Dariba Smelting Complex 48MW addition in Wind Power Generation FY21- Rampura Agucha expansion of 1mn tonne p.a achieved. Commissioned 21, tons p.a Hydrometallurgical Zinc Smelter at Rajpura Dariba FY29 Commissioned 8MWCPP at Zawar Mines and 34.4MW Wind Power Rampura Agucha expansion of 1.25mn tonne p.a achieved. 88 tons p.a zinc debottlenecking completed at Chanderiya Smelting Complex & Debari Zinc Smelter Industry Outlook Zinc After a 5% y-o-y decline in consumption in 29, global zinc demand rose by 4% y-o-y in 21 driven by strong demand for the metal by the dragon nation on the back of restocking. It is expected that the demand for the metal will continue to grow at ~6% in 211 and 212, followed by moderation in 213 & 214 period due to bottleneck in supply from China as the mine life expectancy will come to an end for the projects like Brunwick having capacity of 2Kt, Century with 5Kt, Antamina with 2Kt. On supply side, refine production in 21 was up by 2% y-o-y to 514Kt. China, which accounts for 3% of the world zinc supply, has plans to close around 4Kt of smelter capacity over the next three years due to which supply tightening will be seen after 212. In terms of prices, Zinc prices have rallied in line with the strong price trends in the other base metals, but the metal is currently only about half its pre- 7% 23% 25% End Use of Zinc Source: LME,R K Global Research 45% Construction Transportation Industrial Machinery Consumer products and Electricals R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 3

4 Hindustan Zinc Metals & Mining recession value. In May 26, prices touched $4,6/ton; in the depths of the recession prices slid to just over $1/ton, averaging at $1595/ton in 29, which is currently trading at an average rate of $2277/ton till Q2FY12. World Zinc Demand Supply (in Kt) E Production YOY (%) 7% 3% -3% 4% 5% Consumption YOY (%) 3% 1% -5% 6% 6% Stock LME Price($/ton) Source: Abare, R K Global Research India is one of the fastest growing regions in zinc consumption in the world. It is estimated that India s zinc demand is likely to grow at 12-15% annually as compared to the global average of 5%. On production side, India has ~5% share in the zinc smelter capacity in the Asia-Pacific region. Hindustan Zinc is the only major producer of zinc in India with market share of 8%. Lead Global demand is expected to grow by ~3% to 9231Kt in 211E from the current demand of 8993Kt in 21. It is assumed that the consistent demand will reduce the surplus of the inventory level of metals. Again, China which is the major player in the Lead consumption contribute around 3% for the market of this metal and the rising automobile consumption is growing at a pace which will support the growth of the market for the lead. 3% Increased sales and exports of both original 2% equipment and replacement lead acid batteries 8% Batteries Cable Sheathing together with higher demand from the e bike sector are expected to result in a further rise in Chinese usage of 8.6%. In Europe, it is anticipated that usage 6% Rolled and extruded Shot/Ammunition will rise by 6.3% and in the United States, by 1.7%.It 77% is expected that global lead mine production will Alloys grow primarily due to the higher output in emerging nation. The increase in the production will be influenced by the commissioning of Hindusthan Zinc Pigments Miscelleneous Rajpura Dariba operation in Rajasthan and Johnson Source:Company, R K Global Research Controls Enertec plant in Monterrey, Mexico. In addition, Australian production is expected to recover after a reduction in 21 caused by technical problems at Nyrstar s Port Pirie smelter. World Lead Demand Supply (in Kt) E Supply 7,89 8,23 8,62 8,896 9,261 9,62 YOY (%) Demand 8,17 8,243 8,665 8,669 8,993 9,231 YOY (%) Surplus (127.) (13.) (45.) LME prices($/ton) Source: Abare,R K Global Research We expect that the prices of the metal will be stable in 211 as the global supply of refined lead metal will exceed demand by 1, 23, tons in 211 R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 4

5 Kt Hindustan Zinc Metals & Mining Silver Demand for the silver is growing as it is extensively used in Jewellery, photography and electrical and medicines. Besides demands for investment, demand from industrial is also expected to be positive which will push silver prices higher in the longer term. Its fabrication demand rebounded strongly by 2% in FY1 after 17% contraction in 29. On the supply side it has grown at a CAGR of ~6% in FY11 to 358Kgs from 24366Kgs in FY6. Hence, we expect that the investment demand for silver will grow at 5% in 211 on the back of uncertainty in the US market and the fear of European debt crisis will contribute towards the prices of silver. Apart from these Silver Application we are optimistic on the growth of the emerging market which will boost the 17% Industrial Application demand of silver from the industry. Silver as a 9% 46% Photography precious metal gained 5% over the year at Jewellery `63167mn in April FY11 compared to 5% 16% Silverware `27512mn in corresponding period of FY1. 7% Coins and medals In the past two years, silver had Investment underperformed the market and is now playing a catch-up due to rising industrial Source:LME, R K Global Research usage of the metal, rising base metals prices. (in Kgs) Global production 22,892 24,217 24,366 24,432 24,982 28, YOY % 5.79%.62%.27% 2.25% 15.33% 2.37% Global consumption 25,477 25,62 22,877 23,6 22,687 23, YOY %.56% -1.71%.8% -1.62% 3.63% 14.53% Source: MCX,R K Global Research Investment Thesis World largest Zinc Producer in the world HZL is considered to be one of the largest producers in the world when compared to the rest of the peers. The company zinc production capacity has been doubled to 879Kt in FY11 from 411Kt in FY6 and the company is able to meet the 7% requirement of the world. Top Zinc Producing Companies in the world HZL Xstrata Votorantim Glencore New Boliden R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 5

6 In Mt Hindustan Zinc Metals & Mining We expect that HZL will benefit from the expansion plans by replacing import in the zinc deficit Indian market and will win more market share. With the expansion plan at mines and the smelters in coming years, we expect that the total refined zinc volume will grow at a CAGR of 17% to 165Kt by FY13E from 775Kt in FY11. We expect that with the volume enhancement, revenue will also grow at a CAGR of ~13.7% to `135751mn by FY13E from `14898mn in FY11. Production Capacity at HZL almost doubled Zinc 9 Lead FY6 FY7 FY8 FY9 FY1 FY11 Capacity Expansion to add value for the company In FY1, the company has successfully commissioned Hydrometallurgical zinc at Rajpura Dariba Smelting Complex and the 1mn tons p.a concentrator at Rampura Agucha in FY1. To support the increased capacity of smelter in FY11, they have successfully commissioned 1.5mn tons p.a concentrator at Silver-rich Sindesar Khurd Mine in the last quarter of FY11. Is lead smelter plant was also succefully completed in Q2FY12 as planned by the company. Along with the smelting and the mining, HZL is also in the process to enhance its CPP capacity by commissioning 16 MW (8X2) at Dariba Smelting Complex increasing the total Captive power generation capacity to 474 Mw. Such addition of captive power plant will cut the cost of production of the company as the firm will not have to be dependent on the sourcing of power. The company has planned to exit the silver production capacity upto 5 tons by FY13. Further it has added 15MW in existing Wind Power generation capacity during Q2FY12 and the rest 45Mw is expected to be commissioned by Q3FY12 which will increase the total wind power generation capacity at 273Mw at total cost of $19mn which will accelerate the revenue from wind power plant. Their current Zinc-Lead metal production capacity is 964, tons p.a (879, tons of zinc and 85, tons of lead). To enhance the business operation, it expansion plans are progressing well and is likely to be commissioned between FY12- FY13. Project at HZL Existing Capacity Addition Post add n cap Timeline New Kayar Mining Project NIL.3 mtpa.3 Mtpa Q3 213 Lead Smelter at Dariba 31 1Ktpa 41Ktpa Completed(Q1FY12) Wind Power Project Mw 273.2Mw Q3FY12 Source: Company, R K Global Research R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 6

7 `Mn (in kg) (Rs/kg) Hindustan Zinc Metals & Mining Silver s contribution towards top line to grow from ~6% to ~16% by FY13 HZL is focusing on increasing its silver production and become the Asia s largest and world sixth largest silver producing company by 213 with the total production of 5 tons/annum with commissioning of 1.5mn tons p.a concentrator at Silver-rich Sindesar Khurd Mine in the last quarter of FY11 where silver occurrences are at levels of 2 ppm. With this we expect that revenue from the silver business will grow from `543mn in FY 11 to `21169mn in FY13 and its total contribution to the HZL business will enhance from current 6% to ~16% by FY13E. Silver realization for Q4 and FY 211 was `218mn and `.544mn respectively, up 98% and 58%, compared with the corresponding prior period. The rising Silver prices will be a major boost to HZL profitability at the same cost of production. Currently, around 77% of India s annual silver demand is met through imports. At present, Hindustan Zinc s domestic market share in Silver is 2.5%. Post-augmentation of the capacity, it is likely to be Asia s largest primary silver producer. We expect that the silver business could be a major trigger for the companies valuation. 35 Refined Silver Grew at CAGR of 19% by FY FY7 FY8 FY9 FY1 FY11 FY12E FY13E Refined Silver Avg Silver Prices Contribution of Silver to HZL Revenue FY7 FY8 FY9 FY1 FY11 FY12E FY13E 19% 17% 15% 13% 11% 9% 7% 5% 3% 1% HZL Revenue Silver Contribution (%) Dominant Player at low cost of production, unaffected by the coal price hike HZl is one of the largest integrated players of Zinc Lead business with domestic market share of 8% with global market share of approximately 6%. The company is well poised with the total reserves of mn ton and has CPP of 474Mw. It has the world largest zinc mine at Rampura Agucha with reserves and resources of 12.4 mn tons. In India, there is only one competitor Binani Zinc which has capacity to produce 14Ktpa of Zinc compared to 879Ktpa of HZL. Further, HZL is considered to be the lowest cost producer of Zinc compared to others as it has its own captive mines and power plant which help them to lead the market. HZL unit cost of production of Zinc in FY11 stood at $88/ton R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 7

8 mn tonnes Hindustan Zinc Metals & Mining compared to $698/ton of FY1. Although the company has experienced increase in COP in FY11, was on account of increase in Gratuity ceiling, and appreciation of INR against USD and the higher royalties of $182 per tonne. But the cost is still comparatively very low when compared with the global cost of $175per tonne in 21. It is also not much impacted due to the price hike of Coal India as the company import around 65% to 7% from oversees whereas in India it source from linkage only for 25% to 3%. The company has also benefit of sourcing coal from Madanpur South Coal Company from where it has access of around 31.5mn tons of coal through JV having ownership interest of 18.5%. Rampura Agucha-one of the cost efficient Zinc Mines HZL has the one of the most cost efficient mine at Rampura Agucha with an annual ore production capacity of 6.15mn tons and world class zinc lead deposit of 12.4mn tons. In FY 11, Rampura Agucha produced 677 Kt of contained zinc and 68Kt of contained lead in FY11 McArthur River Production(in kt) 22E 2 surge by 1% and 23% respectively compared to Penasquito 29 previous year. Its ore production capacity increased Lanping 24 from 5.mtpa to 6.mtpa due to the the successful commissioning of 1mtpa concentrator in March 21. Ozernoe 264 Rampura Agucha is also one of the lowest cost zinc producer globally due to its rich ore grade which allows the mine a high recovery and overall low cost of production. It is expected that the mine will produce ore of around 725Kt by 22 which will be highest Selwyn Mount Isa Mehdiabad Gamsberg Red Dog among the peers. HZL source 9% of its requirement from Rampura Agucha mines. Rampura 725 Exploration activities unfold reserves and resources The company ongoing exploration activities have yielded significant success with the gross addition of 22.1mn tons to reserves and resources, prior to a depletion of 7.5mn tons in FY11. Total contained zinc-lead metal has increased by 1.4mn tons, prior to a depletion of.84mn tons during the same period. Total reserves and resources as at 31st March 211 were mn tons containing 34.7 mn tons of Zinc-Lead metal and 885 mn ounces of Silver. In FY 211, a total of 68,2 meters of core and non-core drilling was completed at various exploration sites throughout the mines and tenement. Significant R&R additions of mn tons were reported from Rajpura Dariba belt and Zawar mine Source:Presentation,May 21,R K Global Reseach Reserves Resources Total FY7 FY8 FY9 FY11 Source:Company, R K Global Reseach Resources Reserves Name of the mines Measured & Indicated Inferred Proved & Probable mt Grade % mt Grade % g/t mt Grade % g/t Zinc Lead Zinc Lead Silver Zinc Lead Silver Rampura Agucha Rajpura Dariba Sindesar Khurda Bamnia Kalan Zawar Kayar Total R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 8

9 `Mn `/Share ` mn `Mn Hindustan Zinc Metals & Mining Strong reported Balance Sheet E 213E Debt HZL has consistently generated strong cash flow which helped it to fund its capex plan from its internal accrual without raising debts. The company liquid and invested cash reserves in FY1 stood at `119mn which include `11mn in debt mutual fund and `9mn as a fixed deposit in bank. However the cash reserve has increased by 25% in FY11 to `14965mn with `9332 in mutual funds and `5555mn in FD. Total cash balance of the company is expected to increase at CAGR of ~7.4% to `6534mn in FY13E from `56329mn in FY11. We expect that the operating cash flow of the company will further improve and will grow at CAGR of ~24% by FY13 to `73624mn from `47763mn in FY11 with the reduction in the interest cost on debt which stood at `439mn in FY1, came down by ~55% in FY11 to `194 as the company debt almost reduced to zero level in FY Cash E 213E Other income surge by 35% and tax reduction by 1% will enhance profitability. HZL has generated strong revenue from other income of `9889mn in FY11 from `7222mn in FY1 increase of 35% compared to last year due to the increase in the return on investments from 5% to 6% and profit booking Other Income Tax Rate from investment base. We are quite confident that the 12 4% 33.96% 989 company will increase its investment at a CAGR rate of 35% 1 34% in FY13 to `168395mn from `93345mn in FY11 3% which will add towards the revenue growth of the company. Additionally, the tax rate of the company for % 2% current year also got reduced to 13.75% in FY11 from 15% % 16.6% in FY1 due to the tax optimization initiatives 1% towards the company and 28% refundable against 2 5% 1158 MAT Credit Entitlement. Thus overall cost to company % is got dented which is good for long term growth of the FY6 FY7 FY8 FY9 FY1 FY11 company. Sales to be strong, Margins to remain elevated FY 8 FY 9 FY 1 FY 11 FY 12E FY 13E Sales R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation EPS

10 in kt `/kg ` min Hindustan Zinc Metals & Mining It is expected that the company profitability will be enhanced on the back of increased operational front and cost reduction in terms of interest and other expenses. With cost reduction measures, along with the enhanced capacity utilization rate from 73% by producing 775Kt in FY11 to nearly 87% by volume production of 165Kt by FY13E on the back of high R&R which is expected to led revenue growth at CAGR of 13.7% to `135751mn in FY13 from `14898mn in FY11. HZL has maintained average PBITDM of ~54% from last 3 years to FY11 and we expect that this trend will continue in the coming years on the back of better operational performance coupled with the rising metal prices will help company to maintain its PATM and PBIDTM at 54% and 63% respectively in next two years. With the profitability increased, we expect that the EPS of the company will also move up to ` ~14 per share and ` ~16 per share in FY12E and FY13E. *(EPS is considered after stock split and bonus issue which brought down the face value to `2 and increase the share capital to `845 mn) 1 9 PBIDT PAT PBIDTM% PATM% 9% 8% FY8 FY9 FY1 FY11 FY12 FY13 7% 6% 5% 4% 3% 2% 1% % Realization is expected to grow with voluminous growth During Q4 and FY 211, the company has achieved its highest ever mined metal production of 231, tons and 84, tons, up 19% and 9% respectively, compared with the corresponding prior periods due to the higher contribution from Rampura Agucha and Sindesar Khurd mines. Refined Zinc metal production, during Q4 and FY 211, was highest ever at 194Kt and 712Kt up 29% and 23% respectively compared with the corresponding prior periods due to the increase contribution from Dariba Hydro Zinc. With the voluminous growth we expect that the realization of the company will grow at a steady rate although not at the same pace due to the incessant cost pressure and increased volume. We expect Zinc production will grow at CAGR rate of 18% by producing 165Kt in FY13 from 775Kt in FY11 and the realization will grow to `127per Kt in FY13E. Volumes Realization E 213E Sourec:Company,R K Global Research R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 1

11 Kg Hindustan Zinc Metals & Mining Anglo assets to add value for HZL business Anglo American acquisition at $161mn by the parent company Sterlite industries will prove to be profitable business for HZL as the Anglo American assets has R&R of 22mn tons which will be supportive for HZL as the company utilization rate is expected to mop up at an average rate of more than 8% by FY13E compared to 73% in FY11. We expect HZL revenue will grow at CAGR of ~16% during FY11-13 period while its margin is expected to hover around 58%-6% during the same period. Location Mine Ownership R &R (Mnt) R&R Grade Production 29 Zn % Pb % Zn (Kt) Pb(Kt) Namibia Skorpion Mine 1% % NIL 15Kt NIL Gergarub Agmnt with Rosh Pinah NIL NIL NIL NIL NIL S.A Black Mountain Mine 74% % 2.9% 21Kt 36Kt Gamsberg 74% %.4% NIL NIL Ireland Lisheen Mine 1% % 1.9% 172Kt 19Kt Zinc market to remain strong with steel major demand. Indian steel industry has grown sharply on the back of rapid progress on strong fundamentals over the years. Also the Zinc end uses government has taken various industrial reforms and has planned to invest `214crs (23% increased) for infra space in Brss/Bronze FY11-12 budget. Crude steel production has grown at CAGR of 6.4% in 21 to 66.8mmt and it is expected that the production will grow at CAGR of 1% during Hence with the growth in steel demand the market of the zinc will also be strong in FY12. The major users of Zinc are in galvanizing, die casting, chemicals, others, alloys, brass bronze. Steel industry basically uses 47% of zinc for coating steel in order to avoid rust. With demand to grow at 1% along with the government proactive incentive plans to boost economic growth by injecting funds in 3% 9% 8% 14% 19% 47% Galvanising Die Casting Chemicals Others Alloys various industries, such as construction, infrastructure, automobile, and power will drive the steel industry in future. Steel major, Tata Steel executive is also positive for the steel Sourec:Company,R K Global Research demand in Asia and expect 9% growth annually. With the growth of the steel demand we feel that the zinc market will remain strengthen in the FY12 and FY13 as it is expected that the per capita consumption of steel will move up in near term. Per Capita Consumption of finished steel R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 11

12 Hindustan Zinc Metals & Mining Key Risk to Investment Political, Economical and Regulatory Risk: HZL s profitability depends greatly on government trade and royalty policy. For instance, if export duties or royalties for zinc are hiked, or the government discontinues technical assistance, the company's top-line could suffer. Furthermore, if the company fails to extend mining leases due to expire in FY 21; production at a number of its mines will be brought to a standstill, posing a downside risk to our rating. Excessive dependent on Rampura Agucha for production: Rampura Agucha has the longest mine life (2 years) and the largest reserves in the company's portfolio. Its other sites have an average mine life of just 1-12 years. This leaves the company particularly dependent on high grades achieved at Rampura Agucha, especially after other sites have been depleted. If grades at this site deteriorate, there would be a downside risk to our rating as the company's zinc production would likely fall short of our expectations. Delivery of expansion project on time and within the budget: The Company has many undergoing Greenfield and the brown field projects in their hand completion of which is highly dependent on the regulatory approval, renewals of approvals, human resource constraints, technical issues, civil or other unforeseen reasons. So any delay in such requirement, will impact the company as a whole. It is expected that the company is facing some inflationary pressure from civil side at Utkal project, if delayed will additionally cost 6cr to the company. Thus it will impact the company as whole as well as our rating. Commodity and Currency risk: HZL business includes Zinc and Lead which are priced with reference to LME prices which in turn is highly influenced by global demand and supply impacted by the economic scenario, infrastructure spending and speculative activities. Our calculation for revenue is based on forward prices of LME and exchange rates and their correlation with the revenue. Hence any changes from that assumption will change our valuation Destruction in demand driver: HZL's products are mainly used in the steel industry, which is suffering from the global economic slowdown. Many major steel companies have announced the production cuts globally and in India. Continued weak demand for steel, will affect the demand for zinc. Taxes and Royalties: Mining companies in India are liable to pay several taxes and duties. Currently, HZL pays royalty of around 8.4%, 12.7% and 7.2% in zinc, lead and silver respectively. Hence any hike in these rates would have a negative impact on the margins and thereby, on the profitability of the company. Outlook & Valuation At current market price of `121.95, the stock is trading at EV/EBITDA of ~5.5x of its FY13E, EBITDA of `79732mn. We believe that the stock deserve premium as the company is largest producer of zinc and expected to gain from its silver business. We expect to see upside in the coming years with its strong fundamentals and zero debt with substantial cash reserves on its books. We initiate a BUY rating on the HZL stock with target price of ` 159, an upside potential of ~3%, using EV/EBITDA of 6.5x FY13E. EV/EBITDA valuation table (`Mn) FY13E EBITDA Exp EV/EBITDA (x) 6.5 Expected EV Market Cap Expected No of Share (mn) 4225 Fair Value (`) 159 R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 12

13 Hindustan Zinc Metals & Mining Financial Highlight (` Mln) Income Statement FY1 FY11 FY12E FY13E Balance Sheet FY1 FY11 FY12E FY13E Net Sales Liabilities Total Expenditure Share Capital and Warrants Operating Profit (Excl OI) Shareholder's Funds Other Income Total Debts Operating Profit Total Liabilities Interest Assets PBDT Gross Block Depreciation Less: Accumulates Dep Profit Before Tax Net Block Provision for Tax Capital Work in Progress Profit After Tax Investments Cash and Bank Ratios FY1 FY11 FY12E FY13E Total Current Assets Per Share Less: Current Liabilities Earnings Per Share (Rs) Net Current Assets CEPS(Rs) DTA/L Book Value (Rs) Total Assets Dividend Pay Out Ratio Margin Ratios Cash Flow Statement FY1 FY11 FY12E FY13E PBIDTM (%) 58% 55% 63% 64% Cash Flow from Operating Activities OPM% 67% 65% 73% 73% EBDIT EBITM (%) 67% 65% 73% 73% Changes in CA (Ex. Cash) Pre Tax Margin(%) 63% 6% 69% 68% Changes in CL PATM (%) 5% 49% 53% 54% Changes In WC Performance Ratios Cash fro Operation ROA (%) 21% 2% 21% 2% Direct Taxes Paid ROE (%) 23% 23% 22% 22% Net Cash From Operation ROCE (%) 3% 29% 29% 28% Cash Flow from Investing Activities Sales/Fixed Asset(x) Capital Expenditure (CAPEX) Working Capital/Sales(x) Investments Growth Ratio Net Cash From Investing Net Sales Growth(%) 41% 24% 11% 14% Cash Flow from Financing Activities Core EBITDA Growth(%) 71% 17% 26% 15% Change in Debt EBIT Growth(%) 77% 16% 29% 15% Change in Equity 4225 PAT Growth(%) 48% 21% 2% 16% Interest Paid EPS Growth(%) -38% 8% 2% 16% Dividends Paid Financial Stability Ratios Others Total Debt/Equity(x).... DTL & Misc Expenditues Current Ratio(x) Net Cash From Financing Interest Cover(x) Net Increase in Cash Cash at the End R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 13

14 Hindustan Zinc Metals & Mining Locate Us For Suggestions, clarifications & your valuable feedback write back to us at: R K Global Research R K Global Institutional Sales R K Global Shares & Securities Ltd: R K Global Shares & Securities Ltd: Flat No.: B12, Park Tower, 53 & 54 Adamji Building, 67B Ballygunge Circular Road, Narsi Natha Street, Masjid Bunder (West) Kolkata 7 19 Mumbai- 4 9 Board: +91 (33) Board: +91 (22) research@rkglobal.in inst.desk@rkglobal.in City Address Contact Ahmedabad 51, Wall Street, near Gujarat College, Ahmedabad (79) Delhi Suite 5, Sagar Apartment, 6 Tilak Marg, New Delhi (11) Jaipur 248, Ganpati Plaza, 2 nd Floor, M I Road, Jaipur (141) Kolkata 2 Saklat Place, Suite 9, Kolkata (33) Mumbai 38, 3 rd Floor Morya Estate, Opposite Infiniti Mall, New Link Road, Andheri West, Mumbai (22) Chennai 163/2, Kutcherry Road, Mylapore Chennai (44) Rating Criteria BUY Stock to generate return above 15% from CMP over the next 12 months period HOLD Stock to generate return between -15% from CMP over the next 12 months period SELL Stock to generate less than % from CMP over the next 12 months period Coverage Terminology IC = Initiating Coverage RU = Result Update EU = Event Update NC = Not Covered Disclaimer: This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. R K Global, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report. R K Global Shares & Securities Ltd-Private Client Research Equity Research For Private Client Circulation 14