Beat on all counts; tight supplies to keep the Zinc prices firm October 20, 2015 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs159 Target Price Rs190 Implied Upside 19.5% Sensex 27,307 Nifty 8,262 (Prices as on October 20, 2015) Trading data Market Cap. (Rs bn) 672.9 Shares o/s (m) 4,225.3 3M Avg. Daily value (Rs m) 143.4 Major shareholders Promoters 64.92% Foreign 2.28% Domestic Inst. 30.96% Public & Other 1.84% Stock Performance (%) 1M 6M 12M Absolute 17.2 (6.5) (2.9) Relative 13.1 (4.4) (6.2) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 19.4 18.0 7.7 2017 20.9 19.5 7.3 Price Performance (RIC: HZNC.BO, BB: HZ IN) (Rs) 200 150 100 50 0 Oct 14 Dec 14 Feb 15 Source: Bloomberg Apr 15 Jun 15 Aug 15 Oct 15 Hindustan Zinc (HZ) reported Q2FY16 earnings above our expectation. The beat was primarily driven by better than expected Silver and Lead volumes and lower costs. Zinc and Lead prices rebounded strongly on the back of production curtailments announced by Glencore. We expect the strength in prices to sustain as couple of large mines are scheduled to close down permanently. Given the strong outlook on Zinc, quality assets and attractive valuations (EV/EBITDA:3.5x FY17E), we maintain BUY with TP of Rs190, EV/EBITDA of 5.0x FY17E. Beats estimates across the fronts: Refined metal (Zinc + Lead) sales volume grew 23% QoQ/24% YoY to 257kt (PLe:250kt) on the back of improved mined metal availability. The key surprise came on the front of silver volumes, driven by strong recovery in SK mines. Silver volumes were up 48% QoQ/39% YoY at 112t (PLe:87t). Thanks to strong scale and lower energy cost, cost of production fell 1.2% QoQ/9.8% YoY to ~Rs78170 (PLe:Rs81,155)/t of refined metal. Hence, EBITDA grew 13% QoQ (+5% YoY) to Rs20.4bn against our estimate of Rs18.1bn. PAT grew 20% QoQ (+4.5% YoY) to Rs22.9bn (PLe: Rs19.4bn) on the back of steep rise in other income (on account of MTM gain on treasury investments), partially offset by higher tax rate. Key highlights of con call: 1) Expects production of refined metal in excess of 900kt in FY16 against 860kt in FY15 2) Maintained guidance of 32 50% increase in integrated silver's production at 350 400t in FY16 3) Capex would be at US$200 225m in FY16 4) Expect tax rate to be in the range of 14 15% for FY16 5) Would produce additional 200kt of refined metal in FY18 through debottlecking of smelter capacity 6) Post expansion of SK mine's capacity from current 2mtpa to 3mtpa, HZ's peak silver refining capacity would reach around 600t by the end of FY16 from current 500t 7) Permanent closure of Lisheen and Century mines coupled with announced production cut of 500kt by Glencore would reduce the global concentrate supplies by 1m tonnes in aggregate, equivalent to 7% of global supplies. This would keep the Zinc prices firm for a sustainable period. Key financials (Y/e March) 2014 2015 2016E 2017E Revenues (Rs m) 134,590 132,770 150,031 159,661 Growth (%) 7.5 (1.4) 13.0 6.4 EBITDA (Rs m) 67,228 59,082 74,191 78,050 PAT (Rs m) 69,046 68,686 82,105 88,306 EPS (Rs) 16.3 16.3 19.4 20.9 Growth (%) 29.9 (0.5) 19.5 7.6 Net DPS (Rs) 3.5 4.4 4.9 5.0 Profitability & Valuation 2014 2015 2016E 2017E EBITDA margin (%) 50.0 44.5 49.5 48.9 RoE (%) 19.8 17.0 17.8 16.9 RoCE (%) 19.9 17.0 17.8 16.9 EV / sales (x) 4.8 4.8 3.9 3.4 EV / EBITDA (x) 6.2 6.2 4.3 3.5 PE (x) 9.7 9.8 8.2 7.6 P / BV (x) 1.8 1.6 1.4 1.2 Net dividend yield (%) 2.2 2.8 3.1 3.1 Source: Company Data; PL Research Q2FY16 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: Q2FY16 Result Overview (Rs m) Y/e March Q2FY16 Q2FY15 YoY gr. (%) Q1FY16 H1FY16 H1FY15 YoY gr. (%) Net Sales 39,083 37,492 4.2 35,958 75,041 67,119 11.8 Raw material consumed 1,476 819 80.2 (2,284) (807) 3,571 (122.6) % of Net Sales 3.8 2.2 6.4 1.1 5.3 Stores and Spares consumed 2,715 3,362 (19.3) 2,499 5,214 6,324 (17.6) % of Net Sales 6.9 9.0 6.9 6.9 9.4 Power and Fuel 3,130 3,043 2.9 3,608 6,738 5,320 26.7 % of Net Sales 8.0 8.1 10.0 9.0 7.9 Mining Royalty Rates 3,062 3,030 1.1 6,291 9,353 5,017 86.4 % of Net Sales 7.8 8.1 17.5 12.5 7.5 Other Manufacturing expenses 4,610 4,070 13.3 4,578 9,189 7,735 18.8 % of Net Sales 11.8 10.9 12.7 12.2 11.5 Employee Cost 2,143 2,156 (0.6) 1,900 4,043 3,774 7.1 % of Net Sales 5.5 5.8 5.3 5.4 5.6 Selling, General and Administrative 1,555 1,548 0.5 1,344 2,900 2,836 2.2 % of Net Sales 4.0 4.1 3.7 3.9 4.2 Total Expenditure 18,692 18,028 3.7 17,937 36,629 34,576 5.9 EBITDA 20,391 19,464 4.8 18,021 38,412 32,543 18.0 Margin (%) 52.2 51.9 50.1 51.2 48.5 Depreciation 1,750 2,061 (15.1) 1,729 3,480 4,084 (14.8) Other Income 9,939 7,498 32.6 5,981 15,920 15,117 5.3 EBIT 28,580 24,901 14.8 22,273 50,852 43,576 16.7 Interest 12 13 (7.6) 16 28 89 (68.4) PBT 28,568 24,888 14.8 22,256 50,824 43,487 16.9 Extraordinary Income/(Expense) (28) (1,761) (1,761) (28) PBT (After EO) 28,568 24,860 14.9 20,495 49,063 43,459 12.9 Tax 5,715 3,025 88.9 1,287 7,003 5,447 28.6 % PBT 20.0 12.2 6.3 14.3 12.5 Reported PAT 22,853 21,835 4.7 19,208 42,061 38,012 10.7 Adjusted PAT 22,853 21,860 4.5 19,121 43,570 38,036 14.5 Source: Company Data, PL Research October 20, 2015 2
Exhibit 2: Key Operating metrics Y/e March Q2FY16 Q2FY15 YoY gr. (%) Q1FY16 H1FY16 H1FY15 YoY gr. (%) Production volume Mined metal (Zinc+Lead) tonnes 240,000 212,575 12.9 232,000 472,000 375,575 25.7 Refined metal (Zinc+Lead) tonnes 251,765 210,746 19.5 217,608 469,373 381,966 22.9 Silver (kgs) 112,000 80,000 40.0 75,000 187,000 162,000 15.4 Sales volume Refined Zinc 217,000 178,000 21.9 180,000 397,000 320,000 24.1 Refined Lead 40,000 30,000 33.3 29,000 69,000 62,000 11.3 Sulphuric acid 299,000 NA 326,000 326,000 544,000 (40.1) Silver (kgs) 112,500 81,000 38.9 76,000 188,500 163,000 15.6 Realisation (Rs/unit) Refined Zinc 132,995 159,494 (16.6) 154,833 142,897 153,000 (6.6) Refined Lead 126,750 147,667 (14.2) 141,724 133,043 144,355 (7.8) Silver (kgs) 31,733 38,642 (17.9) 34,079 32,679 38,712 (15.6) Source: Company Data, PL Research October 20, 2015 3
Income Statement (Rs m) Net Revenue 134,590 132,770 150,031 159,661 Raw Material Expenses Gross Profit 134,590 132,770 150,031 159,661 Employee Cost 7,417 8,689 8,402 8,907 Other Expenses 59,945 64,999 67,437 72,705 EBITDA 67,228 59,082 74,191 78,050 Depr. & Amortization 7,846 6,442 7,062 7,710 Net Interest 449 235 242 257 Other Income 20,765 30,179 29,096 35,045 Profit before Tax 79,697 82,584 95,983 105,127 Total Tax 10,651 13,921 15,357 16,820 Profit after Tax 69,046 68,663 80,626 88,306 Ex Od items / Min. Int. (23) (1,479) Adj. PAT 69,046 68,686 82,105 88,306 Avg. Shares O/S (m) 4,225.3 4,225.3 4,225.3 4,225.3 EPS (Rs.) 16.3 16.3 19.4 20.9 Cash Flow Abstract (Rs m) C/F from Operations 54,712 55,307 56,166 58,608 C/F from Investing (9,797) (8,432) 12,246 14,522 C/F from Financing (15,774) (19,020) (22,334) (25,040) Inc. / Dec. in Cash 29,141 27,855 46,078 48,091 Opening Cash 69,421 30,314 35,315 81,393 Closing Cash 68,804 28,532 81,393 129,483 FCFF 60,996 56,697 72,444 74,617 FCFE 60,996 56,697 72,444 74,617 Key Financial Metrics Growth Revenue (%) 7.5 (1.4) 13.0 6.4 EBITDA (%) 6.1 (12.1) 25.6 5.2 PAT (%) 29.9 (0.5) 19.5 7.6 EPS (%) 29.9 (0.5) 19.5 7.6 Profitability EBITDA Margin (%) 50.0 44.5 49.5 48.9 PAT Margin (%) 51.3 51.7 54.7 55.3 RoCE (%) 19.9 17.0 17.8 16.9 RoE (%) 19.8 17.0 17.8 16.9 Balance Sheet Net Debt : Equity (0.1) (0.1) (0.2) (0.2) Net Wrkng Cap. (days) Valuation PER (x) 9.7 9.8 8.2 7.6 P / B (x) 1.8 1.6 1.4 1.2 EV / EBITDA (x) 6.2 6.2 4.3 3.5 EV / Sales (x) 4.8 4.8 3.9 3.4 Earnings Quality Eff. Tax Rate 13.4 16.9 16.0 16.0 Other Inc / PBT 26.1 36.6 31.6 33.3 Eff. Depr. Rate (%) 5.8 4.4 4.6 4.6 FCFE / PAT 88.3 82.5 88.2 84.5 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 374,176 433,531 491,470 554,994 Total Debt Other Liabilities 16,581 25,186 29,985 35,242 Total Liabilities 390,757 458,717 521,455 590,236 Net Fixed Assets 111,083 117,802 127,240 137,780 Goodwill Investments 225,064 272,536 272,536 272,536 Net Current Assets 54,611 68,379 121,680 179,920 Cash & Equivalents 30,314 35,315 81,393 129,483 Other Current Assets 50,306 64,267 74,208 85,996 Current Liabilities 26,010 31,203 33,921 35,559 Other Assets Total Assets 390,757 458,717 521,455 590,236 Quarterly Financials (Rs m) Y/e March Q3FY15 Q4FY15 Q1FY16 Q2FY16 Net Revenue 38,037 40,731 35,958 39,083 EBITDA 20,398 19,259 18,021 20,391 % of revenue 53.6 47.3 50.1 52.2 Depr. & Amortization 2,090 268 1,729 1,750 Net Interest 8 138 16 12 Other Income 8,616 6,475 5,981 9,939 Profit before Tax 26,916 25,327 20,495 28,568 Total Tax 3,122 5,353 1,287 Profit after Tax 23,794 19,974 19,208 28,568 Adj. PAT 23,794 19,974 20,858 28,568 Key Operating Metrics Mined Zinc metal prod MIC tns 769,897 774,300 841,273 871,245 Mined Lead metal prod MIC tns 109,821 112,800 144,851 160,112 Total Mines metal MIC tns 879,718 887,100 986,124 1,031,356 Refined Zinc Vol. (tonnes) 750,766 736,400 800,038 827,682 Refined Lead Vol. (tonnes) 121,120 129,200 135,870 148,457 Total Refined metal tns 871,886 865,600 935,908 976,140 Concentrate sales vol (MIC tns) 1,876 Silver Sales Vol. (kg) 352,000 327,700 377,307 413,093 Zinc (US$) LME / tonne 1,909 2,177 1,920 1,950 Lead(US$) LME / tonne 2,093 2,021 1,850 1,900 Silver (Rs / Kg) 44,143 36,229 33,020 34,125 Cost per tonne of Refined metal (Zn+Pb) 77,260 85,130 81,033 83,606 Source: Company Data, PL Research. October 20, 2015 4
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