Earnings in line; best placed in the base metal pack July 21, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating Accumulate Price Rs193 Target Price Rs215 Implied Upside 11.4% Sensex 27,711 Nifty 8,510 (Prices as on July 21, 2016) Trading data Market Cap. (Rs bn) 816.3 Shares o/s (m) 4,225.3 3M Avg. Daily value (Rs m) 270 Major shareholders Promoters 64.92% Foreign 2.28% Domestic Inst. 30.96% Public & Other 1.84% Stock Performance (%) 1M 6M 12M Absolute 9.5 57.0 35.6 Relative 6.1 41.4 37.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 18.7 17.0 9.6 2018 19.6 18.8 4.5 Price Performance (RIC: HZNC.BO, BB: HZ IN) (Rs) 250 200 150 100 50 0 Jul 15 Sep 15 Nov 15 Source: Bloomberg Jan 16 Mar 16 May 16 Jul 16 Hindustan Zinc (HZ) reported Q1FY17 earnings in line with our expectation on operational level. However, PAT came below our expectation due to change in depreciation method and higher tax rate. We expect Zinc to continue to outpeform base metal pack on the back of permanent closure of large mines (due to depleted reserves) and production curtailment by dominant players. Given the structural tightness in the market, we maintain our aggressive estimates on Zinc at US$2100/US$2150 for FY17E/FY18E. Driven by strong outlook on Zinc, quality assets and attractive valuations (EV/EBITDA:5x FY17E), we maintain Accumulate with TP of Rs215, EV/EBITDA of 6x FY18E. Lower volumes drive fall in earnings: As guided by company in previous quarter, volumes fell sharply in the quarter as more waste was excavated than ore for RA mine s development. Hence, net Sales fell 30% YoY to Rs25.0bn (PLe: Rs24.4bn) due to 32% YoY drop in refined metal vol at 143kt (PLe: 148kt) and 7% YoY drop in realisations at Rs141,748 (PLe: Rs140715), partly supported by a 16% YoY rise in silver volumes at 88t (PLe: 74t) and a 11% YoY rise in its realisations Rs37,727/kg (PLe: Rs35,500). EBITDA/t fell 26% YoY at Rs63,827 above our estimate of Rs61,126 on the back of lower than expected energy and employee cost. Led by lower volumes and higher costs, EBITDA fell 50% YoY at Rs9.1bn (PLe:Rs9.05bn). Impacted by higher depreciation (due to change in method from SLM to WDV, resulting in additional exp of Rs1.7bn), capitalization of M2M gain on corporate bonds (Rs660m) under new IndAS and higher tax rate (20.5% v/s PLe:15%), adjusted PAT fell 60% YoY at Rs8.5bn (PLe:Rs12.5bn). Key highlights of con call: 1) Mgmt expects market to remain in deficit, supporting zinc prices and premiums 2) Silver production may reach 500 t (from 425 t in FY16) 3) Capex for FY17 to be USD300 350mn (Rs20 24bn), up from Rs16bn in FY15, to be incurred mainly on mine development, smelter debottlenecking (Rs2bn), completion of 1.5 MTPA mill. 4) Smelter Debottlenecking and new mill commissioning to be adequate to support higher mined metal output without requiring additional capacity 5) Smelter debottlenecking to be completed by Q3FY17, 1.5 MTPA mill to be completed by Q4FY17. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 145,887 139,590 166,555 178,047 Growth (%) 8.4 (4.3) 19.3 6.9 EBITDA (Rs m) 72,199 65,273 86,282 92,063 PAT (Rs m) 81,804 83,607 78,902 82,921 EPS (Rs) 19.4 19.8 18.7 19.6 Growth (%) 18.5 2.2 (5.6) 5.1 Net DPS (Rs) 4.4 5.0 7.0 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 49.5 46.8 51.8 51.7 RoE (%) 20.3 20.5 19.3 18.0 RoCE (%) 20.3 20.5 19.3 18.0 EV / sales (x) 3.5 3.3 3.2 2.6 EV / EBITDA (x) 7.0 7.2 6.1 5.0 PE (x) 10.0 9.8 10.3 9.8 P / BV (x) 1.9 2.1 1.9 1.7 Net dividend yield (%) 2.3 2.6 3.6 Source: Company Data; PL Research Q1FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q1FY17 Result Overview (Rs m) Y/e March Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 FY17E FY16 YoY gr. (%) Net Sales 25,015 35,958 (30.4) 30,697 166,555 139,590 19.3 Raw material consumed 1,734 (2,284) (175.9) 1,494 2,202 2,348 (6.2) % of Net Sales 6.9 6.4 4.9 1.3 1.7 Stores and Spares consumed 2,417 2,499 (3.3) 2,461 11,158 10,388 7.4 % of Net Sales 9.7 6.9 8.0 6.7 7.4 Power and Fuel 1,681 3,608 (53.4) 2,181 12,409 12,275 1.1 % of Net Sales 6.7 10.0 7.1 7.5 8.8 Mining Royalty Rates 2,634 6,291 (58.1) 3,462 20,575 16,447 25.1 % of Net Sales 10.5 17.5 11.3 12.4 11.8 Other Manufacturing expenses 4,590 4,578 0.3 5,024 18,407 18,452 (0.2) % of Net Sales 18.4 12.7 16.4 11.1 13.2 Employee Cost 1,727 1,830 (5.6) 1,986 8,907 8,081 10.2 % of Net Sales 6.9 5.1 6.5 5.3 5.8 Selling, General and Administrative 1,104 1,344 (17.9) 1,636 6,615 6,325 4.6 % of Net Sales 4.4 3.7 5.3 4.0 4.5 Total Expenditure 15,887 17,867 (11.1) 18,243 80,273 74,317 8.0 EBITDA 9,127 18,091 (49.5) 12,454 86,282 65,273 32.2 Margin (%) 36.5 50.3 40.6 51.8 46.8 Depreciation 3,644 1,729 110.8 1,930 14,366 7,126 101.6 Other Income 6,393 6,174 3.5 8,049 26,980 30,163 (10.6) EBIT 11,876 22,536 (47.3) 18,572 98,896 88,309 12.0 Interest 712 16 4,323.6 90 268 169 58.5 PBT 11,163 22,520 (50.4) 18,482 98,627 88,140 11.9 Extraordinary Income/(Expense) 1,885 (1,831) (4) (1,842) PBT (After EO) 13,048 20,689 (36.9) 18,478 98,627 86,297 14.3 Tax 2,680 1,287 108.1 (3,013) 19,725 4,438 344.5 % PBT 20.5 6.2 16.3 20.0 5.1 Reported PAT 10,369 19,401 (46.6) 21,491 78,902 81,859 (3.6) Adjusted PAT 8,484 21,118 (59.8) 21,495 78,902 83,607 (5.6) Source: Company Data, PL Research July 21, 2016 2
Exhibit 2: Key Operating metrics Y/e March Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 FY17E FY16 YoY gr. (%) Production volume Mined metal (Zinc+Lead) tonnes 102,000 232,000 (56.0) 188,000 966,293 888,082 8.8 Refined metal (Zinc+Lead) tonnes 126,000 217,608 (42.1) 192,809 930,870 903,857 3.0 Silver (kgs) 89,000 75,000 18.7 122,000 478,826 425,000 12.7 Sales volume Refined Zinc 120,000 180,000 (33.3) 168,000 773,620 769,000 0.6 Refined Lead 23,000 29,000 (20.7) 41,000 148,940 145,000 2.7 Silver (kgs) 88,000 76,000 15.8 122,000 438,250 425,500 3.0 Realisation (Rs/unit) Refined Zinc 143,833 154,833 (7.1) 119,821 160,115 105,917 51.2 Refined Lead 130,870 141,724 (7.7) 131,220 135,235 92,966 45.5 Silver (kgs) 37,727 34,079 10.7 33,033 35,175 23,126 52.1 Source: Company Data, PL Research July 21, 2016 3
Income Statement (Rs m) Net Revenue 145,887 139,590 166,555 178,047 Raw Material Expenses Gross Profit 145,887 139,590 166,555 178,047 Employee Cost 8,689 8,081 8,907 9,441 Other Expenses 64,999 66,236 71,367 76,543 EBITDA 72,199 65,273 86,282 92,063 Depr. & Amortization 6,442 7,126 14,366 15,356 Net Interest 235 169 268 287 Other Income 30,179 28,320 26,980 27,231 Profit before Tax 95,701 86,297 98,627 103,651 Total Tax 13,921 4,438 19,725 20,730 Profit after Tax 81,780 81,859 78,902 82,921 Ex Od items / Min. Int. (24) (1,748) Adj. PAT 81,804 83,607 78,902 82,921 Avg. Shares O/S (m) 4,225.3 4,225.3 4,225.3 4,225.3 EPS (Rs.) 19.4 19.8 18.7 19.6 Cash Flow Abstract (Rs m) C/F from Operations 55,307 51,833 68,098 73,115 C/F from Investing (8,432) 12,049 1,207 18,781 C/F from Financing (19,020) (22,323) (129,137) (30,026) Inc. / Dec. in Cash 27,855 41,560 (59,831) 61,870 Opening Cash 30,314 35,315 76,875 17,043 Closing Cash 28,532 76,875 17,043 78,914 FCFF 69,814 178,875 (32,980) 91,383 FCFE 69,814 178,875 (32,980) 91,383 Key Financial Metrics Growth Revenue (%) 8.4 (4.3) 19.3 6.9 EBITDA (%) 7.4 (9.6) 32.2 6.7 PAT (%) 18.5 2.2 (5.6) 5.1 EPS (%) 18.5 2.2 (5.6) 5.1 Profitability EBITDA Margin (%) 49.5 46.8 51.8 51.7 PAT Margin (%) 56.1 59.9 47.4 46.6 RoCE (%) 20.3 20.5 19.3 18.0 RoE (%) 20.3 20.5 19.3 18.0 Balance Sheet Net Debt : Equity (0.7) (0.9) (0.7) (0.7) Net Wrkng Cap. (days) Valuation PER (x) 10.0 9.8 10.3 9.8 P / B (x) 1.9 2.1 1.9 1.7 EV / EBITDA (x) 7.0 7.2 6.1 5.0 EV / Sales (x) 3.5 3.3 3.2 2.6 Earnings Quality Eff. Tax Rate 14.5 5.1 20.0 20.0 Other Inc / PBT 31.6 34.2 27.4 26.3 Eff. Depr. Rate (%) 4.4 4.6 8.4 8.7 FCFE / PAT 85.3 213.9 (41.8) 110.2 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 433,531 382,385 436,504 484,730 Total Debt Other Liabilities 25,186 29,688 34,619 39,802 Total Liabilities 458,717 412,073 471,123 524,531 Net Fixed Assets 117,802 127,240 136,373 127,017 Goodwill Investments Net Current Assets 340,915 284,833 334,750 397,515 Cash & Equivalents 307,851 349,411 289,579 351,450 Other Current Assets 64,267 73,184 80,772 88,294 Current Liabilities 31,203 137,762 35,601 42,229 Other Assets Total Assets 458,717 412,073 471,123 524,531 Quarterly Financials (Rs m) Y/e March Q2FY16 Q3FY16 Q4FY16 Q1FY17 Net Revenue 39,083 33,852 30,697 25,015 EBITDA 20,391 14,337 12,454 9,127 % of revenue 52.2 42.4 40.6 36.5 Depr. & Amortization 1,750 1,716 1,930 3,644 Net Interest 12 51 90 712 Other Income 9,939 6,001 8,049 6,393 Profit before Tax 28,568 18,562 18,478 13,048 Total Tax 5,715 449 (3,013) 2,680 Profit after Tax 22,853 18,114 21,491 10,369 Adj. PAT 22,853 18,121 21,496 8,871 Key Operating Metrics Mined Zinc metal prod MIC tns 774,300 809,166 814,339 866,318 Mined Lead metal prod MIC tns 112,800 141,428 151,954 159,587 Total Mines metal MIC tns 887,100 950,594 966,293 1,025,904 Refined Zinc Vol. (tonnes) 736,400 769,505 773,620 823,000 Refined Lead Vol. (tonnes) 129,200 144,760 148,940 148,499 Total Refined metal tns 865,600 914,265 922,560 971,499 Concentrate sales vol (MIC tns) 1,876 2 2 Silver Sales Vol. (kg) 327,700 425,659 438,250 436,098 Zinc (US$) LME / tonne 2,177 1,830 2,100 2,150 Lead(US$) LME / tonne 2,021 1,770 1,800 1,850 Silver (Rs / Kg) 36,229 33,020 35,175 35,175 Cost per tonne of Refined metal (Zn+Pb) 85,130 81,534 87,011 88,507 Source: Company Data, PL Research. July 21, 2016 4
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 47.0% 38.3% 14.8% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Kamlesh Bagmar (CA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Kamlesh Bagmar (CA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. July 21, 2016 5