FY20-22e EPS cut by 7-4% due to lower volumes and higher costs; TP revised to Rs 205; ‘Reduce’ retained due to dear valuations.
HZ’s q2fy20 adjusted Ebitda was in line with our estimates while higher other income and tax one-offs inflated the bottom line. Weak 1HFY20 volumes (-3% y-o-y) due to geo-technical issues led to 5% downgrade in FY2020e volume and costs guidance. Ramp-up issues at HZ’s projects might continue to pose downside risk on volume growth estimates. We cut EPS by 7-4% for FY2020-22e and fair value to Rs 205 (from Rs 211). Maintain Reduce.
Q2FY20— impacted by weak commodity prices and lower volumes
Hindustan Zinc’s Q2FY20 revenue of `45.1 bn (KIE: Rs 44.7 bn) declined 6% y-o-y led by 7-3% y-o-y decline in LME zinc-lead prices. Zinc volumes at 168k tonnes increased by 5% y-o-y; however, lead-silver volumes declined by 10-16% y-o-y due to lower grades led by geo-technical issues at S.K mine. Zinc costs/ton at $1,048/t increased 1% y-o-y due to lower grades, increase in duty for captive power plant despite higher linkage coal availability. HZ capitalised Rs 510 mn of exploration and evacuation costs during the quarter due to change in accounting policy. Adjusted Ebitda at Rs 20.6 bn (KIE: Rs 20.3 bn) declined 11% y-o-y and adjusted net income of Rs 16.6 bn (KIE: Rs 14.4 bn) was 8% lower y-o-y partly offset by higher other income (+50% y-o-y) due to MTM gains. HZ has returned back Rs 3.65 bn of DTL due to change in tax rate and retained its full year tax rate guidance of 23%.
Volume guidance moderation continues; growth remains elusive
HZ expansion projects are largely on track but trial runs and stabilisation is taking longer. HZ has cut its guidance for mine metal production to 0.95 mn (+1 mn tonnes earlier) and silver production to 650 tonnes (750-800 tonnes earlier) led by geo-technical issues at S.K mines during 1HFY20. Lower grades and increase in electricity duty has led to 5% increase in cost guidance to $1,050/ton for FY2020e. We are building 0.94mn tons metal volumes in FY2020e.
Retain REDUCE on expensive valuations
Zinc is facing demand headwinds with slowing global growth whereas upcoming mine supply should reverse the metal deficit in FY2021e. We forecast Zinc price to correct from $2,550/ton in FY2020e to $2,400/ton in FY2021e as market turns into surplus. Lower volumes and weaker INR/US$ results in 7-4% cut in our FY2020-22e EPS forecast. We cut our fair value to `205/share (`211/share earlier) at unchanged 6X EV/Ebitda. We maintain Reduce due to expensive valuations—the stock trades at 6.9X/6.8X FY2020/21e Ebitda estimate.