Stock Market Update on Hindustan Zinc for 1QFY2012

Stock Market  Update on Hindustan Zinc for 1QFY2012 with an Accumulate recommendation and a Target Price `156 (12 months).

For 1QFY2012, Hindustan Zinc’s (HZL) net revenue at `2,821cr was marginally lower than our estimate of `2,941cr. However, net profit at `1,495cr was in-line with our estimate of `1,532cr. We recommend Accumulate on the stock.

Strong performance continues in 1QFY2012: HZL’s net revenue increased by 44.6% yoy to `2,821cr on account of higher sales volume and realisation. Despite the shutdown at Rampura Agucha mine during the quarter, zinc volumes grew by 16.5% yoy to 192kt and lead sales volumes grew by 4.5% yoy to 15kt. Silver sales volume increased by 14.2% yoy to 40,908kg and lead concentrate sales stood at 10,086dmt. Average zinc, lead and silver realisation increased by 11.6%, 25.5% and 98.0% yoy, respectively. On the operating front, staff cost declined by 14.0% yoy to `127cr, which led to EBITDA margin expanding by 406bp yoy to 56.4%. Thus, EBITDA grew by 55.8% yoy to `1,592cr. Further, other income was higher by 124.3% yoy to `355cr, which resulted in net profit growing by 67.8% yoy to `1,495cr despite depreciation increasing by 19.8% yoy to `135cr and higher tax rate at 17.1%.

Outlook and valuation: Currently, the stock is trading at 5.9x FY2012E and 4.4x FY2013E EV/EBITDA. We expect HZL to benefit from the expansion of zinc-lead smelting capacity during FY2012–13. Furthermore, HZL’s expansion in silver-rich Sindesar Khurd mine should result in robust bottom-line growth. HZL had a huge cash balance of `15,720cr as of June 30, 2011 (`37 per share).  We recommend Accumulate on the stock with a target price of `156.