Hindustan Zinc (HZL) reported a stellar set of Q2FY17 numbers with beat on all parameters. The stock seems to have taken a breather post the result after an impressive run up (1M- 17%, 3M- 28%). We remain upbeat on HZL anchored by: estimated 40% y-o-y jump in H2FY17 EPS; firm LME zinc price outlook due to concentrate supply deficit; and dividend policy entailing potential payout of Rs 10-12/share for FY17 and FY18 each. We raise our FY17/FY18 LME zinc estimates to $2,150/2,250 taking cognizance of the prevailing $2,300/t price. Hence, we revise up FY17/FY18E EPS 22%/17%. At this level, we are at the higher end of consensus. In view of HZL being net cash company, we move to P/E instead of EV/EBITDA and ascribe 14x FY18E EPS, in line with global peers with positive RoE. Maintain ‘buy’ with revised target price of Rs 304 (Rs 207 earlier), 11.3x FY18E EPS.
HZL’s EBITDA surpassed our and consensus estimates predominantly due to higher mined metal (MM) production — up 51% q-o-q at 194KT — and lower cost of production (COP/t) — down 12% q-o-q at $809/t. During the earnings call, management stated that COP for H2FY17 is likely to dip further due to operating leverage benefits and reiterated that MM production will reach 1.2mt by FY20.