Buy Hindustan Zinc; target of Rs 151: Nirmal Bang

“Hindustan Zinc’s (HZL) FY12 annual report analysis shows the company’s strong focus on expansion of mining capacity. The management has indicated that the global zinc market is set to witness closure of 1.2mt mining capacity by 2016, which should support zinc prices. We broadly agree with the above rationale and it was also one of the strong arguments in our initiating coverage report on the non-ferrous sector, ‘The Long (zinc) & Short (aluminium) Of It’. We retain our Buy rating as well as the target price of Rs151, which is 27% higher than the CMP.”

“HZL continued to generate strong cash flow and its net cash balance touched a record high of Rs179,472mn at the end of FY12. It added free cash flow of Rs29,822mn in FY12 as compared to Rs30,887mn in FY11, despite a multi-fold jump in dividend payment, from Rs2,956mn in FY11 to Rs12,277mn in FY12, on account of higher dividend payout and also interim dividend payment. To get higher yields, HZL has started investing in tax-free bonds of NHAI, PFC, IRFC, HUDCO, REC and perpetual bonds of Tata Steel from FY12 onwards. However, these investments, at Rs13,796mn, accounted for only 8% of total cash and cash equivalents. Liquid mutual fund and bank deposits accounted for 63% and 29%, respectively, of total cash and cash equivalents. Although reserves and resources (R&R) addition remains positive, a detailed analysis indicates less optimism than what is depicted by the headline numbers. Gross R&R rose 8.7% in FY12 as compared to 3.5% increase in zinc-lead metal, implying the deterioration of grade. Besides this, R&R at the flagship mine, Rampura Agucha, dropped, while Zawar mine, which is yet to renew its mining lease, accounted for 32% of net R&R addition.”

“Inventory turnover days improved on an annual basis, but deteriorated on quarterly basis, while debtor turnover days worsened on both counts, but still near 10 days. Trade payable days fell on quarterly as well as annual basis. HZL is currently trading at P/E multiples of 7.9x and 7.3x on FY13E and FY14E earnings, while EV/EBITDA multiples stand at 4.0x and 3.2x for the same period. We assign a Buy rating to the stock with a target price of Rs151 (5.0x FY14 EV/EBITDA), which is 27% higher than the CMP,” says Nirmal Bang research report.

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