Hindustan Zinc’s Q4FY17 EBITDA of Rs 37 billion surpassed consensus estimates. We remain upbeat on HZL as capacity ramp up is on schedule; cost of production (COP) is expected to remain below Rs 55,000/tonne for FY18/19; and good dividend yield is likely to continue in both FY18E and FY19E. On marginally lowering our cost estimates, our FY18/19E EPS stands 8%/5% higher. We maintain ‘buy’ with a revised TP of Rs 337, implying exit P/E of 13.8x FY19E which is in line with global peers, despite HZL expected to generate superior RoE of 28-29% through to FY19.
EBITDA exceeded consensus estimates owing to better than expected zinc and lead sales volumes. Mined metal (MM) production surged 66% y-o-y to touch the highest-ever level of 312kt. Earnings were also buoyed by robust Zn and lead prices. COP/t, on the other hand, declined 8% y-o-y to Rs 53,226 reaping benefits of operating leverage.
We expect EPS CAGR of 11% over FY17-19, primarily with volume ramp up at all mines proceeding as per schedule resulting in 1.2 MT of MM production by FY20. Further, higher silver volume is expected to boost operating profit.
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We are upbeat on HZL as the stock offers twin benefits of EPS growth and stable dividend yield of 4-5% for both FY18E and FY19E. The stock has consistently delivered better EBITDA margins and RoEs versus global peers in past 8 years. We maintain ‘buy/SO’ with a revised target price of Rs 337, implying exit P/E of 13.8x FY19E which is in-line with global peers’ average.
MM production during the quarter jumped 66% y-o-y to a record 312KT as HZL ramped up production at Rampur Agucha (RA) mine from both open pit and underground operations. The transition from open pit to underground mining is expected to be complete by FY19. Refined Zn volumes grew 37% y-o-y to Rs 217KT, while lead volumes grew 15% y-o-y to 47KT. The biggest plus was higher silver volumes, up 11% y-o-y to 135 tonnes. As a result of operating leverage, Zn COP/tonne fell 8% y-o-y to Rs 53,226. We expect this to increase marginally due to slightly lower grade material at the ramped up mines, though we still expect it to remain below Rs 55,000/tonne on average.