Buy Hindustan Zinc; target of Rs 200: P Lilladher

Prabhudas Lilladher's report on Hindustan Zinc

"Hindustan Zinc (HZ) reported Q2FY15 earnings ahead of our expectation on account of higher-than-expected volumes. We expect company to report stronger growth in H2FY15 earnings on the back of firm metal prices and higher planned volumes. Given the strong outlook on zinc, quality assets (with cost in the Top 10 percentile) and attractive valuations (EV/EBITDA:3.9x FY16E); we maintain “BUY” with TP of Rs200, EV/EBITDA of 6.0x FY16E."

"Mined metal volumes rose 30% QoQ to 213kt (PLe: 197kt) on account of increased ore production that waste. Management expects to report strong volumes in H2FY15 with the release of capacities for ore production. In line with growth in mined metal, refined metal production grew 23% QoQ to 211kt (PLe:201kt). Benefitted by higher production and lower concentrate purchases, cost of production fell 9% QoQ to ~Rs87k (PLe:89k)/t of refined metal. Led by strong realisations, lower cost and higher volumes, EBITDA grew 49% QoQ at Rs19.5bn against our estimate of Rs18.7bn. Lower tax rate and higher than expected other income on account of MTM gains on FMPs further fuelled the beat on PAT. PAT grew 35% QoQ to Rs 21.9bn."

"Zinc is expected to remain in deficit for couple of years, primarily on account of closure of mines and steady growth in consumption. Lead is expected to be in marginal surplus in 2014; however the trend is expected to reverse on the back of lower growth in production. We built in LME-Zn/LME-Pb at US$2200/US$2100/t in FY15E, up 15%/0.3% YoY", says Prabhudas Lilladher research report.

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