Angel Broking neutral on Hindustan Zinc

“Hindustan Zinc’s (HZL) 3QFY2012 results were broadly in-line with our expectations. Although net sales grew by 5.6% yoy, EBITDA margin slipped by 689bp yoy mainly due to lower realizations of zinc and lead. Given the recent rise in the stock price, we recommend Neutral on the stock.”

“For 3QFY2012, HZL’s net sales increased by 5.6% yoy to Rs2,747cr (above our estimate of Rs2,574cr) on account of higher sales volumes. However, zinc and lead realization decreased by 4.9% yoy and 4.4% yoy, respectively, while silver realization increased by 33.1% yoy. On account of lower realization and higher costs, EBITDA margin contracted by 689bp yoy to 51.1% and EBITDA decreased by 7.0% yoy to Rs1,402cr. Other income was higher by 84.4% yoy to Rs382cr, which resulted in net profit decreasing only by 0.7% yoy to Rs1,280cr. Excluding exceptional items (Rs6cr in 3QFY2012 and Rs24cr in 3QFY2011), adjusted PAT declined by 0.7% yoy to Rs1,280cr (in-line with our estimate of Rs1,288cr). Reported net profit grew by 0.6% yoy to Rs1,274cr.”

“Despite the recent decline in zinc price, we expect HZL’s net profit to grow by 11.8% and 17.5% yoy in FY2012 and FY2013, respectively, on account of expansion of its zinc-lead smelting capacity. However, at the CMP, the stock is trading at 5.0x FY2013E EV/EBITDA, above its five-year historical average of 4.6x. Further, given the 13.6% rise in the stock in the past three months, we recommend Neutral on the stock. We recommend investors to buy Sterlite Industries (65% stake in HZL) instead of HZL on account of the former’s cheap valuations,” says Angel Broking research report.

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