Hindustan Zinc
BSE SENSEX
34,006
S&P CNX
10,455
9 February 2018
Update
| Sector:
Metals
CMP: INR304
TP: INR342(+13%)
Getting more aggressive on volume growth
Expect special dividend again; maintain Neutral
Neutral
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
HZ IN
4,225
331 / 227
-3/3/-24
1,283.9
19.9
674.0
35.1
Financials Snapshot (INR b)
Y/E March
2018E 2019E 2020E
Sales
220
295
285
EBITDA
122.9 181.4 170.5
NP
91.1 140.9 135.6
Adj. EPS (INR)
21.6
33.3
32.1
EPS Gr(%)
9.6
54.6
-3.8
BV/Sh. (INR)
49.2
70.5
91.1
RoE (%)
35.3
55.7
39.7
RoCE (%)
44.8
76.5
52.8
P/E (x)
14.5
9.4
9.8
P/BV
12.2
8.2
8.4
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
64.9
64.9
64.9
DII
31.3
1.7
1.3
FII
2.2
2.2
3.0
Others
1.7
31.2
30.8
FII Includes depository receipts
Stock Performance (1-year)
Hind.Zinc
Sensex - Rebased
440
380
320
260
200
We met the management of Hindustan Zinc (HZ). Key highlights:
HZ’s mine production ramp-up to 1.2mtpa (v/s 907kt in FY17) is on schedule.
The production run-rate is likely to be achieved in any one of the quarters
during FY19 itself.
This makes us more comfortable on our estimates of 1.05mt
for FY19 and 1.16mt for FY20. There is a possibility of some upside in FY19.
As the mix of silver-rich ore increases,
silver production will increase at a
faster rate.
With the commissioning of Fumers and ramp-up at SK mine, HZ
expects silver production to increase to 700-800t and ultimately to 1,000t.
HZ has
strong focus on enhancing Reserves and Resources (R&R).
Exploration
activities are intensifying further, encouraged by the findings so far. HZ is
strengthening its exploration team with the best in the world. Exploratory
drilling is likely to increase from 70km in FY17 to 200km in FY19. R&R has
increased from 146mt in FY04 to 404mt in FY17 and the plan is to increase it to
550mt. Strong focus on enhancing resources has ensured mine life of more
than 30 years at any time despite 10-fold increase in production in 12-13 years.
Cost of production is likely to decline by ~USD100/t to USD850/t
on full ramp-
up of vertical shaft, availability of coal linkage and operating leverage.
HZ is firming up plans to
further increase mine production by 25% to 1.5mt
at
a capex of USD1.5b over the next 3-4 years, as it is getting more confident on
new R&R findings. HZ is also exploring gold (Bagmara mine) and sulfate
resources, and is optimistic of finding sizable economical reserves.
The
pricing outlook for zinc remains bullish,
as demand continues to outstrip
supply. Though few new supplies (Gamsberg, HZ expansion, Century tailings,
etc) will begin in the near future, the market is expected to remain in deficit.
Expect special dividend in FY18:
With strong free cash flows, HZ is likely to
announce special dividend again. However, the dividend payout policy remains
unchanged at minimum of 30% payout. We have increased payout from 36% to
120% for FY18, while keeping it unchanged at 36% for FY19 onwards. At CMP,
the dividend yield is attractive at ~7% for FY18 and at least 3% thereafter.
We believe HZ will continue to deliver strong volumes
due to strong
management focus, investment in drilling and human resources. We maintain a
bullish zinc price outlook and expect LME to average at USD3,800/t in FY19 and
little lower at USD3,200/t in FY20. EBITDA is expected to increase 45-50%,
driven by volume growth, cost reduction and favorable LME.
We roll over our target price to FY20E and adjust for special dividend. New
target price at INR342 (earlier INR354) implies 12-13% upside and 7% dividend
yield.
Maintain Neutral.
Recent volatility in stock price is an opportunity to buy
the stock, as business fundamentals remain strong, in our view.
Sanjay Jain – Research analyst
(SanjayJain@MotilalOswal.com); +91 22 6129 1523
Dhruv Muchhal – Research analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.