Ebitda CAGR of 18% is estimated over FY21-23e; positives priced in; ‘Neutral’ retained with TP of Rs 268; promoter move an overhang
Hindustan Zinc (HZ)’s Q3FY21 results were strong, as expected, with Ebitda up 43% y-o-y on higher volumes and prices. While silver business remained strong with Ebit of Rs 10.1 bn (37% of total), zinc realised premiums recovered to pre-COVID levels as the share of domestic volumes improved in Q3. As major projects near completion, we expect 9% CAGR in HZ volumes over FY21-23E, driving an 18% CAGR in Ebitda. However, we believe this growth is factored in the current valuation and hence we rate it Neutral.
Ebitda grows 43% y-o-y, led by higher volumes and pricing
Revenue/Ebitda/ PAT at Rs 60.3/ 32.7/ 22.0 bn grew 29%/ 43%/ 36% y-o-y and was 4%/ 6%/ 6% above our estimate led by better-than-expected zinc realisation (owing to higher domestic sales). Strong y-o-y growth was driven by both higher metal volumes (+10% y-o-y) and prices. Sales volumes were strong all across with zinc +6% y-o-y to 182kt, lead +26% y-o-y to 53kt and silver +20% y-o-y to 183t. Realisation was also strong with zinc +15% y-o-y (+15% q-o-q) on higher LME prices and better domestic premiums and silver +39% y-o-y (+3% q-o-q) to Rs 62,623/kg.
Reported CoP rose 3% q-o-q to $946/t, impacted by one-time employee payout amounting to ~$20/t. Other income fell 15% q-o-q (1% y-o-y) to Rs 4.5 bn. In Q3FY21, silver contributed 19% to revenues (v/s 15% in Q3FY20) and 37% to Ebit (v/s 35% in Q3FY20).
Net cash balance stood at Rs 109.9 bn v/s Rs 178.3 bn at Q2FY21-end due to dividend payouts (Rs 90.0 bn) and an increase in working capital in Q3FY21. In 9MFY21, Ebitda rose 13% y-o-y to Rs 78.0 bn. PAT, however, edged up just 1% y-o-y to Rs 55.0 bn, weighed by higher tax rate of 24% v/s 16% in 9MFY20.
Mined metals production guided to exit FY21 at run-rate of 1.2mtpa
Management highlighted that zinc demand has recovered strongly, supported by higher steel demand. Mgmt expects the current strength in LME zinc price to be supported by slow ramp-up in global mined zinc production, prolonged delays in new capacities, and improving demand.
Guidance for mined metal and finished metal production remains unchanged at 925–950kt for FY21 (674kt in 9MFY21). Mgmt expects an exit run-rate of 1.2mtpa mined metal in Q4FY21. HZ is likely to surpass its saleable silver production guidance of 650t for FY21 as it has already achieved 503t in 9MFY21.
Valuation and view
We expect Ebitda for HZ to grow at an 18% CAGR over FY21–23e, primarily owing to a ~9% CAGR in refined metal volumes to 1,122kt. LME zinc price is up nearly 10% y-o-y at $2,652/t; we build in $2,650/2,550 per ton for FY22/FY23e. Promoter Vedanta Ltd pledging part of its shareholding in HZ is an additional overhang on the stock. We thus remain Neutral, with TP of Rs 268/share, based on 6.0x FY22e EV/Ebitda. The stock trades at 6.4x FY22e EV/Ebitda, which we believe prices in attractive dividend yield and potential Ebitda growth.