Buy Hindustan Zinc; target of Rs 147: Emkay

Emkay Global Financial Services is bullish on Hindustan Zinc and has recommended buy rating on the stock with a target of Rs 147 in its July 6, 2012 research report.

“Hindustan Zinc maintains its focus on the exploration activities as has always been. On an average the company has been spending ~US$10 mn per annum on the exploration of new deposits. It has got well experienced team in place in this regard. HZL, earlier got 9 reconnaissance permits (RP) out of which it has submitted 4, as there was no meaningful deposits. The company meanwhile got 6 prospecting licenses and already applied for 3 mining licenses. As the legal issues related to Zawar mine are likely to be resolved soon and we expect some announcements in this regard within 3- 4 months. Despite lower metal grade (3.6% Zn and 2% Pb), Zawar mine, with a reserve and resource of ~72 mt can be a potential game changer for the company going forward. The company also has been focusing on other deposits in Rajasthan, MP, Maharashtra etc. FY13 capex seen at Rs 15- 20 bn including sustaining capex of Rs 3.5 bn.”

“There have been certain concerns related to timely ramp up of projects, cost escalation with respect to underground mining, low production run rate etc. We however, believe that these concerns should sub-side in the medium to longer term. The management confirms that going underground in Ramapura Agucha mine may increase some hauling costs, however, the same would be adjusted by the lower strip ratio (currently at 1:14). In the first year of operation, underground ore production is likely to be 1 mt and would increase subsequently. Also, ramp up of SK mine is likely to aid silver volume. The management is confident of achieving 350 tonne of integrated silver production in FY13 with another 100 tonne is expected to be produced from the purchased concentrate.”

“At the CMP of 125, the stock trades at 8.2xFY14 EPS and 3.8xFY14 EV/ EBITDA. We retain our estimates and continue to value the stock at 5xFY14 EV/ EBITDA that translates to a target price of Rs 147 per share. Maintain Buy,” says Emkay Global Financial Services research report.

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