Stock Market Result Update on Hindustan Zinc for 2QFY2012

Stock Market Result Update on Hindustan Zinc for 2QFY2012 with an Accumulate recommendation and a Target Price of `139 (12 months).

For 2QFY2012, Hindustan Zinc’s (HZL) net revenue at `2,593cr was in-line with our estimate of `2,643cr, while adjusted PAT at `1,369cr was above our estimate of `1,265cr. We recommend Accumulate on the stock.

Robust top-line performance in 2QFY2012: For 2QFY2012, HZL’s net revenue increased by 19.9% yoy to `2,593cr on account of higher sales volume and realization. Zinc, lead and silver sales volumes grew by 5.0%, 1.6% and 12.4% yoy to 184kt, 15kt and 41,454kg, respectively. Average zinc, lead and silver realization increased by 7.4%, 14.2% and 96.6% yoy, respectively.

Strong growth in net profit: Zinc cost of production (excluding royalty) stood at US$847/tonne in 2QFY2012 compared to US$874/tonne in 1QFY2012, reflecting the qoq INR depreciation against the USD. EBITDA margin expanded by 445bp yoy to 56.5% on account of higher realization. EBITDA grew by 30.2% yoy to `1,465cr. Further, other income was higher by 110.2% yoy to `387cr, which resulted in adjusted PAT growing by 41.1% yoy to `1,369cr.

Outlook and valuation: Currently, the stock is trading at 5.7x FY2012E and 3.9x FY2013E EV/EBITDA. We expect HZL to benefit from the expansion of zinc-lead smelting capacity during FY2012-13. Furthermore, HZL’s expansion in the silver-rich Sindesar Khurd mine should result in robust bottom-line growth since there are no additional direct costs involved in silver mining. The company’s cash and equivalents stood at `16,229cr as of September 30, 2011 (cash per share - `38.4). We recommend Accumulate on the stock.