Buy Hindustan Zinc; target of Rs 193: Emkay

Emkay's research report on Hindustan Zinc (HZL)

"Hindustan Zinc (HZL) reported numbers marginally higher to our estimates as higher production of mined metal along operational efficiency resulted in improved performance. MIC production for Q3 was 226kt (+2% YoY; +7% QoQ) resulting in higher integrated production. Integrated production of zinc and lead stood at 192kt (vs 174kt in Q2) and 25kt (vs 26kt in Q2). Revenues at Rs 38.5 bn (+11.7% YoY; +1.3% QoQ) were higher primarily on account of increased production as LME prices and regional premiums had declined QoQ. Zinc and lead premiums for the quarter stood lower at US$ 252 (-25% QoQ) and US$ 222 (-14% QoQ)"

"Zinc CoP (ex-royalty) stood lower qoq (10% in USD terms and 8% in INR terms) at US$ 817/ tonne (Rs 50,534/ tonne) resulting in margins to improve to 54.2% (vs 52.6% in Q2). Decline in zinc CoP was on account of decline in power costs, high by-product credits and increase in production. Management indicated CoP to further decline in Q4 as full benefits of lower coal prices along with benefit of higher volumes is yet to reflect. APAT was Rs 23.8 bn (+38% yoy; +9% qoq) aided by higher treasury income of Rs 8.1 bn (+91.6% YoY; +16.6% QoQ) and lower effective tax rate of 11.6% vs 12.2% in Q2."

"We have pruned our FY16E EPS estimate by 6% incorporating higher royalty in light of the recent MMDR ordinance. However, our target price stands revised 3.5% higher as we roll over to FY17 EPS, which is projected to grow by 6.7%. We value HZL at 5x FY17E EV/EBITDA (at CMP it trades at 3.4x FY17E EV/EBITDA) and thus arrive at a revised target price of Rs 193. We maintain BUY rating on the stock", says Emkay Global Financial Services research report.

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