ICICI Direct recommended hold rating on Hindustan Zinc with a target price of Rs 195 in its research report dated July 22, 2020.
ICICI Direct's research report on Hindustan Zinc
Hindustan Zinc (HZL) reported an operationally muted set of Q1FY21 numbers wherein EBITDA, EBITDA margin came in lower than our estimate. For the quarter, zinc sales volumes came in at ~163000 tonnes (our estimate: 162500 tonnes), lead sales volume were at ~45000 tonnes (our estimate: 42500 tonnes) while silver sales volume came in at ~146000 kg (our estimate: 120000 kg). Topline came in at Rs 3989 crore (down 20% YoY, 9.2% QoQ), broadly in line with our estimate of Rs 3893 crore. EBITDA came in at Rs 1576 crore (down 36.4% YoY, 19.8% QoQ), lower than our estimate of Rs 1692 crore. EBITDA margin was at 39.5%, lower than our estimate of 43.4%. Contribution to PM CARE fund and other start-up costs led to higher reported CoP during Q1FY21. Reported CoP (before royalty) was at US$1019 (Rs 76920) per tonne, which included start-up costs and Rs 101 crore (US$53 per tonne) for contribution towards PM CARE fund. Other income was at Rs 684 crore (up 59.4% YoY, 45.5% QoQ), higher than our estimate of Rs 445 crore. The ensuing PAT came in at Rs 1359 crore.
For the current fiscal year, on an YTD basis (from April 1-July 20, 2020), average zinc prices on LME were at ~US$2000/tonne (down 26% YoY compared with corresponding period last year) while average lead prices on LME were at ~US$1524/tonne (down 15% YoY compared to the corresponding period last year). On the back of muted trend in base metal prices, we expect EBITDA margins to remain subdued at ~44.6% in FY21E. We value the stock at 5x FY22E EV/EBITDA and arrive at a target price of Rs 195. We downgrade the stock from BUY to HOLD recommendation.
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