While HZL’s volumes are expected to rise and cost of production decline, Zn prices are likely to offset gains; ‘Hold’ maintained
Hindustan Zinc’s (HZL’s) Q1FY20 Ebitda of Rs 24.7 bn met consensus. Key highlights:
(i) mined metal (MM) production rose mere 1% y-o-y to 213kt;
(ii) cost of production (CoP)/t grew
2% y-o-y to $1,067 owing primarily to higher power cost and lower grades; and (iii) silver volumes continued to impress—up 15% y-o-y to 159t. Going ahead, while we expect cost to decline owing to several initiatives HZL is pursuing and volume uptick from Q3FY20 onwards, the benefits are likely to be subdued owing to lower LME zinc (zn) price. Maintain Hold with TP of Rs 255/share, implying exit multiple of 12.5x FY21e EPS.
Performance meets estimates; cost expected to decline
HZL’s Q1FY20 Ebitda of Rs 27.9 bn came in line with consensus. Key positives:
(i) impressive growth in silver and lead volumes at 13% and 15% y-o-y, respectively; (ii) Sindesar Khurd (SK) mine set to ramp up to full capacity as the shaft has been fully commissioned and integrated with the mine; and (iii) shaft project at Rampur Agucha (RA) mine expected to be complete by Q3FY20e. Going ahead, we expect COP/t to decline to FY20 guidance of $1,000/t due to: (i) operating leverage benefits—MM production expected to hit 1.2mtpa run rate by Q3FY20E; and (ii) reduction in power cost due to 60-65MW of additional capacity post turbine modification.
Imminent volume growth to offset LME zinc price woes
In addition to hitting MM capacity of 1.2mt, following initiatives are expected to drive growth: (i) fumer will augment silver volume by 35t FY20 end; (ii) steps to increase the MM capacity to 1.35mtpa are underway; and
(iii) recovery of minor metals such as cadmium, mercury, copper and bismuth with potential to add another `10 bn in the long run. However, we believe, Ebitda CAGR will be subdued at 7% through to FY21e owing to lower LME zn prices, expected at $2,350-2,450 over the next two years owing to additional supply coming up.
Outlook and valuation: Balanced risk-reward; maintain ‘HOLD’
We believe HZL will benefit from MM capacity growth of 1.2mtpa by H1FY20e and lower CoP/t. However, a subdued Zinc price outlook will offset such gains. At 11.6x FY21e EPS, the stock is trading on a par with global players (11.7x). We maintain ‘HOLD/SP’ with target price of `255/share as we roll over to Q3FY21e earnings.
Q1FY20 conference call: Key takeaways
*Ongoing shaft commissioning project at RA mine delayed by a quarter. However, management expects the project to be completed by Q3FY20e.
*Commissioning and stabilisation of fumer to add 35t in silver volumes.
*Enabling steps for 1.35mtpa expansion on track. Company expects detailed scoping and feasibility studies to be completed by Q4FY20.
*COP/t expected to stay within the initial guidance of $1,000/t for FY20.
*Focus on minor metal recovery is the next major value driver for the company—revenue potential of Rs 10 bn from the current level of Rs 0.3bn.