Accumulate Hindustan Zinc; target of Rs 215: Prabhudas Lilladher

Hindustan Zinc (HZ) reported Q1FY17 earnings in line with our expectation on operational level. However, PAT came below our expectation due to change in depreciation method and higher tax rate. We expect Zinc to continue to outpeform

base metal pack on the back of permanent closure of large mines (due to depleted

reserves) and production curtailment by dominant players. Given the structural tightness in the market, we maintain our aggressive estimates on Zinc at US$2100/US$2150 for FY17E/FY18E. Driven by strong outlook on Zinc, quality assets and attractive valuations (EV/EBITDA:5x FY17E), we maintain “Accumulate”

with TP of Rs215, EV/EBITDA of 6x FY18E.

Lower volumes drive fall in earnings: As guided by company in previous quarter, volumes fell sharply in the quarter as more waste was excavated than ore for RA mine’s development. Hence, net Sales fell 30% YoY to Rs25.0bn (PLe: Rs24.4bn) due to 32% YoY drop in refined metal vol at 143kt (PLe: 148kt) and 7% YoY drop in realisations at Rs141,748 (PLe: Rs140715), partly supported by a 16% YoY rise in silver volumes at 88t (PLe: 74t) and a 11% YoY rise in its realisations Rs37,727/kg (PLe: Rs35,500). EBITDA/t fell 26% YoY at Rs63,827 above our estimate of Rs61,126 on the back of lower than expected energy and employee cost. Led by lower volumes and higher costs, EBITDA fell 50% YoY at Rs9.1bn (PLe:Rs9.05bn). Impacted by higher depreciation (due to change in method from SLM to WDV, resulting in additional exp of Rs1.7bn), capitalization of M2M gain on corporate bonds (Rs660m) under new IndAS and higher tax rate (20.5% v/s PLe:15%), adjusted PAT fell 60% YoY at Rs8.5bn (PLe:Rs12.5bn).For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.