Strong show, H2 to be stronger than H1 October 21, 2014 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs164 Target Price Rs200 Implied Upside 22.0% Sensex 26,430 Nifty 7,879 (Prices as on October 20, 2014) Trading data Market Cap. (Rs bn) 693.0 Shares o/s (m) 4,225.3 3M Avg. Daily value (Rs m) 400.8 Major shareholders Promoters 64.92% Foreign 2.12% Domestic Inst. 31.06% Public & Other 1.90% Stock Performance (%) 1M 6M 12M Absolute (1.8) 24.5 22.8 Relative 0.6 7.7 (3.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2015 19.9 17.4 14.9 2016 21.2 18.9 12.1 Price Performance (RIC: HZNC.BO, BB: HZ IN) (Rs) 200 150 100 50 0 Oct 13 Dec 13 Feb 14 Source: Bloomberg Apr 14 Jun 14 Aug 14 Oct 14 Hindustan Zinc (HZ) reported Q2FY15 earnings ahead of our expectation on account of higher than expected volumes. We expect company to report stronger growth in H2FY15 earnings on the back of firm metal prices and higher planned volumes. Given the strong outlook on zinc, quality assets (with cost in the Top 10 percentile) and attractive valuations (EV/EBITDA:3.9x FY16E); we maintain BUY with TP of Rs200, EV/EBITDA of 6.0x FY16E. Higher volumes and lower costs led the beat: Mined metal volumes rose 30% QoQ to 213kt (PLe: 197kt) on account of increased ore production that waste. Management expects to report strong volumes in H2FY15 with the release of capacities for ore production. In line with growth in mined metal, refined metal production grew 23% QoQ to 211kt (PLe:201kt). Benefitted by higher production and lower concentrate purchases, cost of production fell 9% QoQ to ~Rs87k (PLe:89k)/t of refined metal. Led by strong realisations, lower cost and higher volumes, EBITDA grew 49% QoQ at Rs19.5bn against our estimate of Rs18.7bn. Lower tax rate and higher than expected other income on account of MTM gains on FMPs further fuelled the beat on PAT. PAT grew 35% QoQ to Rs21.9bn. Strong outlook on Zinc and Lead: Zinc is expected to remain in deficit for couple of years, primarily on account of closure of mines and steady growth in consumption. Lead is expected to be in marginal surplus in 2014; however the trend is expected to reverse on the back of lower growth in production. We built in LME Zn/LME Pb at US$2200/US$2100/t in FY15E, up 15%/0.3% YoY. Key financials (Y/e March) 2013 2014 2015E 2016E Revenues (Rs m) 125,257 134,590 149,726 162,243 Growth (%) 11.3 7.5 11.2 8.4 EBITDA (Rs m) 63,342 67,844 78,140 82,716 PAT (Rs m) 52,969 68,964 84,244 89,457 EPS (Rs) 12.5 16.3 19.9 21.2 Growth (%) (4.0) 30.2 22.2 6.2 Net DPS (Rs) 3.1 3.5 4.4 5.0 Profitability & Valuation 2013 2014 2015E 2016E EBITDA margin (%) 50.6 50.4 52.2 51.0 RoE (%) 17.9 19.8 20.8 19.1 RoCE (%) 18.0 19.9 20.8 19.1 EV / sales (x) 5.0 4.9 4.1 3.5 EV / EBITDA (x) 7.5 6.4 5.0 4.2 PE (x) 13.1 10.0 8.2 7.7 P / BV (x) 2.1 1.9 1.6 1.4 Net dividend yield (%) 1.9 2.1 2.7 3.0 Source: Company Data; PL Research Q2FY15 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: Q2FY15 Result Overview (Rs m) Y/e March Q2FY15 Q2FY14 YoY gr. (%) Q1FY15 H1FY15 H1FY14 YoY gr. (%) Net Sales 37,492 35,205 6.5 29,627 67,119 64,599 3.9 Raw material consumed 819 1,009 (18.9) 2,752 3,571 377 848.4 % of Net Sales 2.2 2.9 9.3 5.3 0.6 Stores and spares consumed 3,362 3,411 (1.4) 2,962 6,324 6,676 (5.3) % of Net Sales 9.0 9.7 10.0 9.4 10.3 Power and fuel 3,043 3,096 (1.7) 2,276 5,320 5,745 (7.4) % of Net Sales 8.1 8.8 7.7 7.9 8.9 Mining Royalty Rates 3,030 2,656 14.1 1,987 5,017 5,185 (3.3) % of Net Sales 8.1 7.5 6.7 7.5 8.0 Other manufacturing expenses 4,070 3,677 10.7 3,665 7,735 7,456 3.7 % of Net Sales 10.9 10.4 12.4 11.5 11.5 Employee Cost 2,156 1,766 22.1 1,617 3,774 3,546 6.4 % of Net Sales 5.8 5.0 5.5 5.6 5.5 Selling, general and administrative 1,548 1,143 35.5 1,288 2,836 2,627 8.0 % of Net Sales 4.1 3.2 4.3 4.2 4.1 Total Expenditure 18,028 16,757 7.6 16,548 34,576 31,611 9.4 EBITDA 19,464 18,447 5.5 13,079 32,543 32,987 (1.3) Margin (%) 51.9 52.4 44.1 48.5 51.1 Depreciation 2,061 1,865 10.5 2,023 4,084 3,708 10.1 Other income 7,498 3,056 145.4 7,619 15,117 9,706 55.8 EBIT 24,901 19,638 26.8 18,675 43,576 38,985 11.8 Interest 13 80 (83.7) 76 89 147 (39.3) PBT 24,888 19,558 27.3 18,599 43,487 38,838 12.0 Extraordinary income/(expense) (28) (612) (28) (617) PBT (After EO) 24,860 18,946 31.2 18,599 43,459 38,222 13.7 Tax 3,025 2,544 18.9 2,422 5,447 5,215 4.5 % PBT 12.2 13.4 13.0 12.5 13.6 Reported PAT 21,835 16,403 33.1 16,177 38,012 33,007 15.2 Adjusted PAT 21,860 16,932 29.1 16,177 38,036 33,540 13.4 Source: Company Data, PL Research October 21, 2014 2
Exhibit 2: Key Operating metrics Y/e March Q2FY15 Q2FY14 YoY gr. (%) Q1FY15 H1FY15 H1FY14 YoY gr. (%) Production volume Mined metal (Zinc+Lead) tonnes 212,575 221,646 (4.1) 163,000 375,575 459,646 (18.3) Refined metal (Zinc+Lead) tonnes 211,000 226,566 (6.9) 171,220 382,220 431,354 (11.4) Silver (kgs) 80,000 90,000 (11.1) 82,000 162,000 186,000 (12.9) Sales volume Refined Zinc 178,000 196,000 (9.2) 142,000 320,000 367,000 (12.8) Refined Lead 30,000 31,000 (3.2) 32,000 62,000 61,000 1.6 Sulphuric acid 299,000 369,000 (19.0) 245,000 544,000 663,000 (17.9) Silver (kgs) 81,000 91,000 (11.0) 82,000 163,000 183,000 (10.9) Realisation (Rs/unit) Refined Zinc 159,494 131,122 21.6 144,859 153,000 124,142 23.2 Refined Lead 147,667 146,129 1.1 141,250 144,355 140,164 3.0 Silver (kgs) 38,642 42,637 (9.4) 38,780 38,712 43,497 (11.0) Source: Company Data, PL Research October 21, 2014 3
Income Statement (Rs m) Net Revenue 125,257 134,590 149,726 162,243 Raw Material Expenses Gross Profit 125,257 134,590 149,726 162,243 Employee Cost 6,499 6,801 7,821 8,368 Other Expenses 55,416 59,945 63,766 71,159 EBITDA 63,342 67,844 78,140 82,716 Depr. & Amortization 6,470 7,846 8,270 8,510 Net Interest 269 449 321 348 Other Income 21,598 20,148 27,284 30,162 Profit before Tax 78,201 79,697 96,832 104,019 Total Tax 25,176 10,651 12,588 14,563 Profit after Tax 53,025 69,046 84,244 89,457 Ex Od items / Min. Int. (294) (1,151) Adj. PAT 52,969 68,964 84,244 89,457 Avg. Shares O/S (m) 4,225.3 4,225.3 4,225.3 4,225.3 EPS (Rs.) 12.5 16.3 19.9 21.2 Cash Flow Abstract (Rs m) C/F from Operations 47,850 55,365 60,738 63,082 C/F from Investing (12,150) (10,450) 3,897 6,627 C/F from Financing (12,546) (15,774) (19,106) (22,593) Inc. / Dec. in Cash 23,154 29,141 45,529 47,116 Opening Cash 52,553 69,421 30,314 75,843 Closing Cash 55,165 68,804 75,843 122,959 FCFF 41,002 60,913 81,875 86,212 FCFE 40,998 60,913 81,875 86,212 Key Financial Metrics Growth Revenue (%) 11.3 7.5 11.2 8.4 EBITDA (%) 7.0 7.1 15.2 5.9 PAT (%) (4.0) 30.2 22.2 6.2 EPS (%) (4.0) 30.2 22.2 6.2 Profitability EBITDA Margin (%) 50.6 50.4 52.2 51.0 PAT Margin (%) 42.3 51.2 56.3 55.1 RoCE (%) 18.0 19.9 20.8 19.1 RoE (%) 17.9 19.8 20.8 19.1 Balance Sheet Net Debt : Equity (0.2) (0.1) (0.2) (0.2) Net Wrkng Cap. (days) Valuation PER (x) 13.1 10.0 8.2 7.7 P / B (x) 2.1 1.9 1.6 1.4 EV / EBITDA (x) 7.5 6.4 5.0 4.2 EV / Sales (x) 5.0 4.9 4.1 3.5 Earnings Quality Eff. Tax Rate 32.2 13.4 13.0 14.0 Other Inc / PBT 27.8 25.9 28.2 29.0 Eff. Depr. Rate (%) 5.3 5.8 5.9 5.9 FCFE / PAT 77.4 88.3 97.2 96.4 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 322,757 374,176 436,669 501,409 Total Debt Other Liabilities 12,799 16,581 19,486 22,607 Total Liabilities 335,556 390,757 456,155 524,015 Net Fixed Assets 99,143 111,083 124,312 137,302 Goodwill Investments 145,399 225,064 225,064 225,064 Net Current Assets 91,015 54,611 106,779 161,650 Cash & Equivalents 69,421 30,314 75,843 122,959 Other Current Assets 40,692 50,306 61,655 73,797 Current Liabilities 19,098 26,010 30,719 35,106 Other Assets Total Assets 335,556 390,757 456,155 524,015 Quarterly Financials (Rs m) Y/e March Q3FY14 Q4FY14 Q1FY15 Q2FY15 Net Revenue 34,104 35,887 29,627 37,492 EBITDA 17,841 17,012 13,079 19,464 % of revenue 52.3 47.4 44.1 51.9 Depr. & Amortization 2,097 2,041 2,023 2,061 Net Interest 100 203 76 13 Other Income 4,636 6,427 7,619 7,498 Profit before Tax 20,280 21,195 18,599 24,860 Total Tax 3,053 2,383 2,422 3,025 Profit after Tax 17,227 18,812 16,177 21,835 Adj. PAT 17,227 18,812 16,177 21,860 Key Operating Metrics Mined Zinc metal prod MIC tns 764,671 769,897 787,764 865,692 Mined Lead metal prod MIC tns 105,529 109,821 120,303 133,616 Total Mines metal MIC tns 870,200 879,718 908,067 999,308 Refined Zinc Vol. (tonnes) 674,958 750,766 748,376 798,310 Refined Lead Vol. (tonnes) 117,445 121,120 127,752 132,843 Total Refined metal tns 792,403 871,886 876,128 931,153 Concentrate sales vol (MIC tns) 61,097 25,366 Silver Sales Vol. (kg) 374,000 352,000 407,157 423,054 Zinc (US$) LME / tonne 1,948 1,909 2,200 2,200 Lead(US$) LME / tonne 2,113 2,093 2,100 2,150 Silver (Rs / Kg) 56,193 44,142 39,000 40,200 Cost per tonne of Mined metal (Zn+Pb) 78,135 76,553 81,708 85,407 Source: Company Data, PL Research. October 21, 2014 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 % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 50.0% 31.7% 18.3% 0.0% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature 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 This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (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 accept 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. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. October 21, 2014 5