Buy Hindustan Zinc; target Rs 150: P Lilladher

Prabhudas Lilladher is bullish on Hindustan Zinc (HZ) and has recommended accumulate rating on the stock with a target price of Rs 150 in its February 22, 2013 research report.

"HZ underperformed Nifty ~12% YTD on account of street’s negative reaction to Government’s inclination to sell the stake through OFSs. However, we believe that steep fall in stock price have dissuaded the Govt from moving ahead aggressively on the proposed sale through OFSs. This has pushed the Govt to look out for other options including negotiation with Vedanta in order to realise higher price. Given the strong likelihood of stake sale at a much higher price and beaten down valuations (EV/EBITDA:3.4x FY14E).

Our channel checks suggest that concerned ministry of mines and finance are well cognizant of the steep fall in stock price and resultant contraction in targeted receipt from sale. Given the cumbersome formality of parliamentary approval involved for sale, the Government is in no hurry for the sale and also looking at negotiations with Vedanta for complete stake sell-out to garner higher price.

Both Zn and Pb hit 15-month highs on the back of structural disruption in production and rising consumption. Zn is expected to remain in deficit for couple of years, primarily on account of growth in consumption outpacing the rise in production. Pb is expected to be in marginal surplus in 2013; however the trend is expected to reverse on the back of lower growth in production. We built in LME-Zn and LME-Pb at US$2030 and US$2200 in FY14E, conservative to current price levels of US$2140 and US$2400.

Stock fell to near-1-year low, contrary to trend in LME, primarily on the concerns associated with OFSs. Slide has been so severe that stock corrected below its lowest range of EV/EBITDA band at 4x 1-year forward earnings. Backed by firm outlook on Zn and Pb, attractive valuations and strong asset quality; we upgrade the stock to buy with target price of Rs 150," says Prabhudas Lilladher research report.

Public holding more than 90% in Indian cos

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