Hindustan Zinc (HZL) reported strong set of numbers. Adj. EBITDA at Rs 20.3b (up 1% YoY) was ahead of our estimate of Rs 17.7 b. Operating performance beat was driven by de-stocking of 6kt zinc metal, certain write-backs in other operating income and declining fuel costs. Reported EBITDA was Rs 21.7b on write-back of R1.4b excess provisioning toward DMF (District Mineral Fund) in the earlier two quarters. Other income was significantly higher at Rs 8.7b on MTM gains (AS30) arising due to fall in interest rates. Adjusted PAT at Rs 21.5b was up 33% YoY .
The outlook for zinc prices has turned positive despite demand-side uncertainties. Glencore recently announced production cut of 500kt to preserve value of minerals; just before that, ILZSG had estimated a deficit of 160kt for 2016—this should support zinc prices, if not drive them up. We are raising the LME assumption from $1,840 to $1,872 for FY16 and from $1658 to $1670/t for FY17. We raise FY16E/FY17E EPS 6%/3%. It is difficult for zinc to trade at a significant premium to aluminum because the substitution accelerates in coated application. The stock is trading at an attractive EV/EBITDA of 5.1xFY17E.
Hindustan Zinc will benefit from production ramp-up at SK mine. We expect mine production at HZL to increase by 5%/2% in FY16E/17E. The company plans to increase mining capacity to 1.2mt, given its healthy reserves and successful exploration programs over the years. Total R&R at March 31, 2015 increased by 10mt (after depletion of 9.4mt) to 375.1mt containing 35.3mt of zinc-lead metal and 970Moz of silver.