ICICI Direct is bullish on Hindustan Zinc has recommended buy rating on the stock with a target price of Rs 245 in its research report dated January 22, 2020.
ICICI Direct's research report on Hindustan Zinc
Hindustan Zinc reported a steady set of Q3FY20 numbers wherein topline, EBITDA and PAT came in broadly in line with our estimates. For the quarter, zinc sales volumes came in at ~172000 tonnes (up 2% QoQ & down 8% YoY), lead sales volume came in at ~42000 tonnes (down 5% QoQ, 22% YoY) while silver sales volume came in at ~154000 kg (up 14% QoQ, down 13% YoY). Topline was at Rs 4672 crore (up 4% QoQ, down 16% YoY) in line our estimate of Rs 4688 crore. EBITDA came in at Rs 2289 crore (up 8% QoQ, down 19% YoY), broadly in line with our estimate of Rs 2317 crore. EBITDA margin came in at 49.0% (51.2% in Q3FY19, 46.9% in Q2FY20) vs. our estimate of 49.4%. HZL’s cost of production (CoP) before royalty during the quarter was US$1077 (Rs 76571) per tonne, up 3% in US$ terms (4% in rupee terms) sequentially. During the quarter, HZL reported PAT of Rs 1620 crore, a decline of 22% QoQ, 27% YoY (our estimate: Rs 1650 crore). Excluding the one-time impact of deferred tax reversal in Q2FY20, net profit for Q3FY20 was down 3% QoQ.
Going forward, we expect domestic zinc demand to pick up on the back of incremental demand from key user industries, especially railways. Indian Railways is setting targets to lay zinc-coated rails and has fitted stations with galvanised roofs to replace asbestos sheets. This augurs well for domestic zinc demand. Additionally, the recent uptick in zinc and lead prices on the LME augurs well. This will aid EBITDA margins to inch upwards from Q3FY20 levels. We value the stock at 6x FY21E EV/EBITDA and arrive at a target price of Rs 245. We upgrade the stock to BUY recommendation.
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