Outperform rating on Hindustan Zinc shares, margins strong: Macquarie

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SummaryHindustan Zinc reported Ebitda of Rs 1,850 crore, 5% above estimates.

Hindustan Zinc (HZL) reported Ebitda of R1,850 crore, 5% above our and consensus estimates due to marginally better physical premiums. However, reported NPAT of R1,640 crore includes ~R150 crore of MTM losses on the bond portfolio. Our outlook for silver and zinc remains weak in the near term; however, a weak rupee and steady physical premiums should continue to support Hindustan Zinc margins. At 8x PER FY14E, Hindustan Zinc provides low-risk exposure and a strong balance sheet. Maintain outperform.

Hindustan Zinc reported net sales at R3,500 crore, up 25%y-o-y on +21% metal sales volumes and strong physical premiums. Ebitda of R1,840 crore was up 32% y-o-y despite 8% increase in Zn COP due to lower byproduct credits.

In 1H14, Hindustan Zinc achieved 48% of its FY14 mine metal production guidance of 950kt vs 43% last year. Also, it has achieved $981/t Ebitda margin in 1H14 and now requires margins of $959/t in 2H14E to achieve our full-year estimates. We are 4% above consensus for FY14E and comfortable with our estimates.

Hindustan Zinc plans to increase mine metal production capacity by 20% to 1.2 mtpa over the next five years. However, we think that due to the shift from opencast mining to underground mining at its largest mine, Rampura Agucha, HZ will find it difficult to operate at current rated capacity. Already, its other underground mine, SK mine, despite six years of operation, is still well below its rated capacity of 2 mtpa.

- Macquarie

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