HINDUSTAN ZINC LTD PRICE RS.284 TARGET RS.300 ACCUMULATE. Company Update. Key Highlights. Outlook

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1 Company Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 340 / 261 Face Value (Rs) : 2 3M Avg. daily vol (Nos) : 1,882,902 Shares o/s (mn) : 4225 Source: Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 225, , ,056 Growth (%) EBITDA 122, , ,163 EBITDA margin (%) PAT 92,760 97, ,035 EPS EPS Growth (%) BV (Rs/share) Dividend/share (Rs) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x) , Kotak Securities - PCG Shareholding Pattern (%) (%) Jun-18 Mar-18 Dec-17 Promoters FII DII Others Price Performance (%) (%) 1M 3M 6M Hindustan Zinc 7.2 (1.8) (10.1) Nifty Source: Bloomberg Price chart (Rs) Aug-17 Dec-17 Apr-18 Aug-18 Source: Bloomberg HINDUSTAN ZINC LTD PRICE RS.284 TARGET RS.300 ACCUMULATE Hindustan Zinc s (HZ) intent to ramp up its mined-metal capacity to 1.5MT in the medium term through expansion of SK and Zawar mines and taking several initiatives to curtail cost of production, is expected to improve its operating leverage. In the near term, FY19E metal production will be higher than FY18 as production improves in subsequent quarters led by ramp-up of underground mines (1.2MT run-rate will likely be hit by 4QFY19). Key Highlights HZ continue to be one of the lowest cost producers globally, even though the recovery in commodity prices resulted in higher operating costs and offset the leverage of higher volume and cost optimization initiatives. HZ s mined metal production increased 4.4% to 947,383 tons in FY18, driven by higher ore production from underground mines, partly offset by lower open-cast production and lower ore grades. Declining feed grade, increased in coal (+38%), metcoke and diesel (+15%) prices, led to increase in cost of production to Rs63,583/tonne (ex-royalty), which further increased to Rs69,900/tonne in 1QFY19. Management expect the cost to decline to US$ /tonne, backed by improved sourcing of linkage coal and higher production Expansion plans to 1.2MT remain on track but volume growth would be strong in FY20E post commissioning of shafts. Next leg of expansion projects to 1.5MT, with phase 1 taking the capacity to 1.35MT along with new hydro smelter of 240KT, at an estimated capex of Rs45bn and should be complete in three years time. Zinc market fundamentals continued to remain robust with global zinc consumption expected to grow by 2.5% to 14.8MT in 2018 while mine supply will be 13.7MT Outlook Zinc prices corrected in the recent past due to trade war and increase in zinc inventory (surplus in 1QFY19). However, as per ILZSG, zinc market is expected to remain in deficit in 2018 and we foresee the HZ to benefit from the favorable zinc environment, resulting in cumulative free cash flow of Rs210bn by end of FY20E. Besides this, given its presences in the lower end of the cost curve globally (backed by high grade captive mines), diversified revenue stream with an increasing contribution from silver and strong balance sheet augurs well for the company. At CMP, the stock trades at 6.5x/5.8x FY19E/FY20E EV/EBITDA, which in our view is fairly valued and offers limited upside. Hence, recommend Accumulate (earlier BUY) Downside risk Slower ramp-up in volumes and higher than expected cost of production Upside risk Jatin Damania Jatin.damania@kotak.com Higher LME and rupee depreciation (every 1% movement in USD/INR, EBITDA impact is ~1.5%). Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

2 HZ mined metal expansion on track The volume journey to 1.2MT (run-rate) is likely to be achieved by Q4FY19, supported by the start of production of shafts at Rampura Agucha (RA) / Sindesar Khurd (SK) underground mines in 3QFY19. Beyond which, HZ s vision to grow mined metal output to 1.5MT and silver production to 1,500MT is on track. The board has approved phase I, to grow capacity to 1.35MT and matching smelting capacity over the next three years, at an estimated project cost of Rs45bn. The company received environmental clearance from MOEF for increasing the ore production capacity at SK mine to 6 MT from 4.5MT. Whereas, Zawar mine capacity is expected to increase to 4.5MT from 2MT by FY20. We expect, mined metal volume to increase to 1.2MT by end of FY20E from 947KT in FY18. Mined metal volume to increase it 1.2MT , FY15 FY16 FY17 FY18 FY19E FY20E, Kotak Securities Private Client Research SK and Zawar mine key contributor to the volume Ore Production (tonnes) FY15 FY16 FY17 FY18 Rampura Agucha 5,450,000 4,704,000 4,701,000 3,842,000 Sindesar Khurd 1,910,000 2,970,000 3,665,000 4,500,000 Rajpura Dariba 573, , , ,000 Zawar 1,056,000 1,350,000 1,770,000 2,176,000 Kayad 372, ,000 1,000,000 1,200,000 Total 9,361,000 10,453,000 11,882,000 12,614,000 Zinc content in ore (%) Rampura Agucha Sindesar Khurd Rajpura Dariba Zawar Kayad Lead content in ore (%) Rampura Agucha Sindesar Khurd Rajpura Dariba Zawar Kayad Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

3 Production (tonnes) FY15 FY16 FY17 FY18 Zinc Mined Metal Production (tonnes) Rampura Agucha 640, , , ,000 Sindesar Khurd 65,100 91, , ,700 Rajpura Dariba 25,400 31,800 31,400 37,200 Zawar 27,400 33,300 38,600 40,100 Kayad 15,600 78,000 84, ,100 Lead Mined Metal Production (tonnes) Rampura Agucha 57,400 55,200 45,600 41,600 Sindesar Khurd 32,400 49,200 60,200 84,100 Rajpura Dariba 5,400 7,300 6,100 7,100 Zawar 16,300 24,900 30,000 30,800 Kayad 1,300 7,900 9,100 10,800 Rampura Agucha mine RA mine volume declined in FY18 to 3.8 MT, with zinc-lead reserve grade averaging 15.7%. The ongoing underground mine project is being developed with a vision of producing 5MT ore production. The underground route has achieved a faster ramp-up from 0.4MT in FY15 to 2.1MT in FY18. Sindesar Khurd Mine The mine achieved production of 4.5MT in FY18 from 3.66MT in FY17, with average reserve of 7%. The company also received environmental clearance from MOEF for increasing the ore production capacity at to 6MT from 4.5MT. To achieve the production rate of 6.0 MT, production from the main ore body is proposed at 3.5 MT and 2.5MT from auxiliary lines. Rajpura Dariba Mine (RDM) The mine achieved its highest ever ore production of 0.9MT and highest ore treatment of 1MT in FY18. As a part of ongoing expansion plan, RDM will be ramped up to 1.5 MT of ore production capacity by FY20E. Zawar mine The mine produced 2.18MT of ore in FY18, registering a growth of ~23% YoY. Ore production capacity at the mine is planned to progressively increase to 4.5MT by FY20E. Kayad mine In FY18, the mine received environment clearance to increase ore production from 1.0 to 1.2 million MT per annum and was ramped up accordingly. HZ- 2 nd largest zinc-lead miner globally HZ- 4 th largest zinc-lead smelter globally GlencoreHindustan Zinc* Teck Boliden Sumitomo Korea Zinc Group Glencore Nyrstar Hindustan Zinc* Yuguang Gold and Lead Co Note: * FY18 figures; Source: Based on Wood Mackenzie Production Ranking Q4 2017, company annual report Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

4 Top 10 silver producing companies 1,687 1,244 1, Hindustan Zinc Volcan Cia Minera SAA Hochschild Mining plc Pan Amrican Silver Corp Cia De Minas Buenaventura SAA Polymetal International plc Goldcorp plc Glencore plc KGHM PolskaMeidz Fresnillo plc Source: GFMS, Thomson Reuters, Company Annual Report Cost of production near its peak Declining feed grade, increase in imported coal costs, metcoke prices and diesel prices led to sharp jump in the cost of production to Rs63,583/tonne (ex-royalty), up 14% YoY. The cost further increased to Rs69,900/tonne (US$1,043) in 1QFY19, largely due to lower volumes, high fuel costs and impact of wage settlement. With the increase in volume, reduction in haulage charges (US$15-20/tonne), due to transportation to shaft from decline and expected decline in coal costs, as sourcing from linkage increases, we expect the cost of production to decline to US$ /tonne, but don t envisage it to go pre FY18 levels. Management expect the cost to decline to US$ /tonne. Among the lowest cost producer of zinc globally Cost of production (Rs/T) 40,003 45,461 51,054 53,228 52,651 55,679 63,583 69,900 FY12 FY13 FY14 FY15 FY16 FY17 FY18 1QFY19 Reserves and Resource supports mine life of over 25 years HZL s priority is to increase resources, at a faster rate, through continuous focus on drilling and exploration programme. During FY18, there was a gross addition of 19.5MT to reserve and resource (R&R). This resulted in addition to total R&R, which now stands at 411.3MT containing 35.7MT of zinc-lead metal and 1 bn ounces of silver, indicating the mine life of over 25 years. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

5 Resource and reserves at the end of FY18 Mines Ore Reserve Mineral Resources Proved & Probable Measure & Indicated Inferred MT Grade (%) g/t MT Grade (%) g/t MT Grade (%) g/t Zinc Lead silver Zinc Lead silver Zinc Lead silver Rampura Agucha Rajpura Dariba Sindesar Khurd Bamnia Kalan Zawar Kayad Total Note: MT million tonnes; g/t grade per tonne - Increase in resource & reserves (MT) 450 led to increase in production (MT) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 2 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Lower demand led to surplus in 1QCY18; ILZSG forecast deficit for 2018 Zinc demand-supply (MT) Jan - Mar Mine Production Metal Production Metal Usage Surplus / (Deficit) (0.02) 0.03 Source: ILZSG As per International Lead and Zinc Study Group (ILZSG), global demand for refined zinc metal will comfortably exceed supply in 2018, with the extent of deficit at 263,000 tonnes. However, in 1QCY18 the global refined metal was in surplus to the tune of 25KT, with an inventory, increasing by 118KT, during the same period. The surplus was on account of lower demand in Europe, Japan, Taiwan (China) and the United States, compared to 1QCY17. Zinc mine production was largely flat, while metal production was up 1.7% YoY. The recent fall in the zinc prices was backed by surplus in 1QCY18 and rising inventories. Going ahead, with the expectation of markets to remain in deficit and possibility of declining inventory will worsen the supply situation and keep LME prices firm in the near term. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

6 Zinc price and inventory trend (US$/T) ('000 T) 4,000 Zinc Price (US$/T) Inventory ('000 T) 1,400 3,500 1,200 3,000 1,000 2, , ,500 1, Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Inventory increased on lower demand ('000 T) 1, , , QFY19 snapshot Mined Metal production as per plan, but cost increased Ramp up of SK mine supported lead volume 325 Mined Metal Production ('000 T - LHS) Zinc Production Cost (Rs/T - RHS) 72, ,000 57, , , QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 35, QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Zinc volume declined on lower grade Cash and cash equivalents at Rs210 bn Cash Reserves (Rs Bn) Other Income (Rs Bn) QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

7 Company background Hindustan Zinc is a Vedanta Group company in zinc, lead and silver business. The company is one of the world's largest integrated producers of zinc and are among leading global lead and silver producers. HZ is also one of the lowest cost producers in the world and are well placed to serve the growing demand of Asian countries. Core business comprises of mining and smelting of zinc and lead along with captive power generation. The company has a metal production capacity with a key lead-zinc mines in Rampura Agucha and Sindesar Khurd; and key modern smelting complexes in Chanderiya and Dariba, all in the state of Rajasthan in India. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

8 Financials: Consolidated Profit and Loss Statement (Rs mn) (Year-end March) FY17 FY18 FY19E FY20E Net sales 187, , , ,056 growth (%) Operating expenses 90, , , ,893 EBITDA 97, , , ,163 growth (%) Depreciation &amortisation 18,112 14,830 18,141 20,141 EBIT 79, , , ,022 Other income 24,737 17,510 17,198 18,375 Interest paid 2,017 2,830 2,547 2,292 Exceptional Items 0 2, PBT 101, , , ,105 Tax 18,837 32,210 38,976 41,070 Effective tax rate (%) Net profit 83,156 92,760 97, ,035 Minority interest Reported Net profit 83,156 92,760 97, ,035 growth (%) , Kotak Securities Private Client Research Balance sheet (Rs mn) (Year-end March) FY17 FY18 FY19E FY20E Cash & Bank balances 83,804 19,640 55,176 65,957 Other Current assets 38,200 40,160 50,753 56,786 Investments 237, , , ,220 Net fixed assets 130, , , ,528 Deferred Tax Asset 27,480 22,080 24,291 24,291 Total assets 517, , , ,783 Current liabilities 124,329 61, , ,590 Borrowings 80, Other non-current liabilities 5,570 7,920 7,920 7,920 Total liabilities 209,904 69, , ,510 Share capital 8,451 8,451 8,451 8,451 Reserves & surplus 299, , , ,815 Shareholders' funds 308, , , ,273 Minority interest Total equity & liabilities 517, , , ,783, Kotak Securities Private Client Research Cashflow Statement (Year-end March) FY17 FY18 FY19E FY20E Pre-tax profit 101, , , ,105 Depreciation 18,112 14,830 18,141 20,141 Chg in working capital 1,084 4,938 27,726 (2,959) Total tax paid 23,380 30,280 38,976 41,070 Other operating activities (21,933) (16,090) 2,547 2,292 Operating CF 75,876 98, , ,509 Capital expenditure (19,870) (27,230) (22,990) (25,000) Chg in investments 136,650 46,200 (35,000) (35,000) Other investing activities 3,290 4, Investing CF 120,070 23,960 (57,990) (60,000) Equity raised/(repaid) Debt raised/(repaid) 79,000 (79,315) (690) 0 Dividend (incl. tax) (189,720) (104,690) (49,436) (49,436) Other financing activities (1,940) (2,485) (2,547) (2,292) Financing CF (112,660)(186,490)(52,673) (51,728) Net chg in cash & bank bal. 83,286 (64,162) 35,533 10,781 Closing cash & bank bal 83,806 19,644 55,176 65,957, Kotak Securities Private Client Research Ratio Analysis (Year-end March) FY17 FY18 FY19E FY20E Profitability and return ratios (%) EBITDAM EBITM NPM RoE RoCE Per share data (Rs) EPS FDEPS BV DPS Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales P/CPS Other key ratios D/E (x) DSO (days) , Kotak Securities Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

9 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 12 months SELL We expect the stock to deliver negative returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Krishna Nain Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Special Situations rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com krishna.nain@kotak.com Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho K. Kathirvelu Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Support Service sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com k.kathirvelu@kotak.com Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Construction, Cement, Building Mat Oil and Gas, Information Tech Midcap Economist teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com kumar.jayesh@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

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