Hold Hindustan Zinc; target of Rs 147: Sushil Finance

Sushil Finance has recommended hold rating on Hindustan Zinc with a target price of Rs 147 in its September 10, 2012 research report. According to the research firm, the company is planning to set up a new roaster at Dariba which is likely to increase its zinc refining capacity by 20,000 MTPA. FY14 would see a marginal pick up in zinc refined volumes.

“Hindustan Zinc’s Net Sales is likely to be marginally negative for FY13E owing to lower zinc sales volume and price realization, with 6% growth in FY14E. Its refined zinc volume is likely to be marginally negative as the company has suspended operations of its vizag smelter which had production of ~28 KT in FY12. We thus feel that the zinc sales volume could see a marginal de-growth of -3% YoY. In order to make up for the production losses at Vizag the company is planning to set up a new roaster at Dariba which is likely to increase its zinc refining capacity by 20,000 MTPA. We therefore believe that FY14 would see a marginal pick up in zinc refined volumes. Apart from de-growth in the zinc volume space, the company is also likely to see a de-growth on the realization front. The Zinc and Lead LME prices have fallen by 13.1% and 13.8% on YoY basis to $1946/tonne and $2081/tonne respectively."

"The company has successfully commissioned its 100 KTPA Dariba smelter in Q2FY12 and 350 TPA silver refinery in Q3FY12, taking the Lead refining capacity to 185 KTPA and that of silver to 518 TPA. The Lead and silver sales volume is likely to grow at a CAGR of 28% p.a and 41% p.a for the next two years to 150,709 tonnes and 413 tonnes respectively, majorly offsetting the downfall due to lower zinc sales volume and price realization. Lead and Silver’s revenue contribution is likely to increase from 10% and 9% in FY12 to 12% and 17% in FY14E respectively."

"Hindustan Zinc falls into the lowest quartile of the cost curve with mining life of over 25 years. Due to its backward integrated operations it is relatively least impacted with the fluctuations in the commodity prices. It has huge cash balance of Rs. 194 bn as of Q1FY13 which provides significant cushion to the company in undertaking initiatives for organic/inorganic growth. For our base case we have taken the zinc price at $1913/tonne and $1970/tonne for FY13E and FY14E respectively. We have valued the stock on an EV/PAT basis. As of FY14E the company’s EV/PAT stands at 5.3x which is very low considering the mining life of over 25yrs, rich ore grade, least cost of production and robust balance sheet with present cash per share of Rs.45.9 (35% of M.Cap). Present payback period of just ~5yrs will be highly lucrative as value of cash per share alone would be equivalent to current M.Cap in the next 7years. However keeping in mind the cautious macro scenario we are keeping our target multiple at just 6.5x, which would be still highly conservative considering converters (much riskier business) trading at an average EV/EBITDA of 5-6x. We recommend hold with a near term target of Rs.147," says Sushil Finance research report.

Non-Institutions holding more than 90% in Indian cos

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