HZ's 1Q15 Sales and EBITDA were a miss from the street expectations. PAT managed to turn out as per street; however that was due to higher than expected other income.

1. 1
Hindustan Zinc
Hiccups now, counting on 2H...
Metal - Zinc
HZ's 1Q15 Sales and EBITDA were a miss from the street expectations. PAT managed to turn out as per street; however that
was due to higher than expected other income. EBITDA miss was a larger (by 11.6%) than the miss at sales (by 4.2%),
implying that the profitability deterioration. Lower MIC production by 18.5% Q-o-Q led to overall higher costs. Operationally,
things in 1H15 were expected to be bad, however 1Q15 has come out as worse. It is the transition phase (from opencast to
Underground) for RAM which is causing such hiccups. We revise our estimates/ target price factoring in higher zinc prices.
We change our rating from Buy to Hold post rise in stock price and our target price is now at INR169 Vs INR 152.
Shareholding (%) Jun-14
Promoters 64.92
FIIs 2.18
DIIs 1.52
Others 31.38
Relative Prince Performance
July 23, 2014 Result Update - Q1FY15
Key Data
BSE Code 500188
NSE Code HINDZINC
Bloomberg Code HZ IN
Reuters Code HZNC.BO
Shares Outstanding (mn) 4225.3
Face Value 2
Mcap (INR bn) 709.64
52 Week H/L 184.00/94.00
2W Avg. Qty.NSE 1773687
Free Float (INR Bn) 248.93
Beta 0.98
Y/E (INR mn) FY13 FY14 FY15E FY16E
Net Sales 126,998 136,360 139,104 150,361
Growth in Sales 11.35 7.37 2.01 8.09
EBIDTAM (%) 51.04 51.05 49.53 47.83
Adj. PAT 67,611 65,513 71,824 74,090
Growth (%) 12.70 -2.44 8.61 3.16
Adj. EPS (INR) 16.04 15.65 17.00 17.53
P/E(x) 10.28 10.54 9.71 9.41
EV/EBIDTA 7.45 6.35 6.15 5.34
Net Debt/Equity -66.46 -68.09 -68.64 -69.38
RoACE (%) 25.54 22.21 20.36 18.63
RoAE (%) 22.92 18.98 17.94 16.32
Sensex: 26026 CMP:INR165 Target Price: INR 169
Pritesh U Jani
pritesh.jani@spagroupindia.com
Ph. No. 91 22 4289 5612
Volumes caused negative revenue growth
HZ's overall revenues de-grew 17.4% sequentially led primarily
by Zinc/Lead. MIC production was lower which led to lower
shipments. Sequentially, Zinc revenues (69% of total sales) were
down by 20.6% due to lower volumes (-23.4% qq). Higher asp's
and premiums helped; else revenues could have seen a larger
fall. HZ's Zinc asp increased 7% Vs LME increase of 2.5%. Zinc
premiums increased by USD108 to USD362/t. Lead revenues
(15% of sales) de-grew 15.7% as volumes there declined
(-16.2%), implying that lead asp's as marginally negative. Leads
premiums increased by USD101 to USD318/t. Silver/sulfuric
acid revenues (10% of sales) moved -ve15%/+56% respectively.
Asp's for silver declined by 7%.
Lowest EBITDA in past 15 quarters
1Q15's performance was so bad that one has to go back 15
quarters ago to find a worst one. EBITDA margins declined due
to overall low mic production, leading to higher per unit costs,
and all this was despite higher zinc prices. PAT's
outperformance was led by higher other income (MTM gains).
Other income stood at 717Cr Vs 588Cr. Tax rate stood at 13.0%
Vs11.2% in 4Q14. Integrated Zinc Cop ex royalty, sequentially
increased by USD106 to USD 1005.
Revising volumes down, while raising zinc prices
Volumes risks as envisaged have got more prominent with
1Q15's numbers. We therefore chose to downward revise
our volume estimates. Our FY15/16 MIC volumes are 855/912Kt
Vs 905/946Kt earlier. Our FY15/16 shipments for refined zinc
at 712/760kt Vs 764/782kt. However, profit estimates do not
change significantly as we factor in higher zinc prices. We
now have assumed FY15/16 Zinc prices at USD2,075/2,125 Vs
USD2,000/2,050.
Valuation -in line to its peers, GOI stake sales could remove the
overhang
HZ is currently trading at 5.3x FY16 EV/EBITDA Vs its global
peers of 5.6x. HZ is no longer cheap (only 6% discount to global
peers) and there is uncertainty over MIC production/costs over
next 2 years. We increase our target price to INR169 from
INR152 and change our rating from Buy to Hold. We value HZ
at 5.6x FY16 EV/EBITDA arriving at target price of INR169. GOI
stake sale will remove the overhang and the stock will then
largely be a play on Zinc fundamentals. A USD100 variation
from our Zinc/Lead price assumptions impacts EBITDA by
6.7 % and target price by 4.4% in FY16E.
80
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130
Apr-13
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Jun-13
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HindZinc Sensex

2. 2
Metal - Zinc
Quarterly Financials
INR mn 1QFY14 4QFY14 4QFY15 QoQ(%) YoY (%)
Net Sales 29,842 36,427 30,072 (17.4) 0.8
EBITDA 15,031 17,552 13,524 (22.9) (10.0)
Margins (%) 50.4 48.2 45.0
Depreciation (1,843) (2,041) (2,023) (0.9) 9.7
EBIT 13,187 15,511 11,501 (25.9) (12.8)
Interest (109) (203) (76)
Other Income 6,203 5,887 7,174 21.9 15.7
PBT 19,281 21,195 18,599 (12.2) (3.5)
Tax (2,671) (2,383) (2,422)
Adj. PAT 16,610 18,812 16,177 (14.0) (2.6)
Margins (%) 55.7 51.6 53.8
EPS (INR) 3.9 4.5 3.8 (14.0) (2.6)
Particulars 1QFY14 4QFY14 1QFY15 QoQ(%) YoY(%)
Sales(tonnes)
Refined Zinc 171,000 184,000 141,000 -23.4 -17.5
Refined Lead 30,000 37,000 31,000 -16.2 3.3
Silver (kg) 92,000 90,000 82,000 -8.9 -10.9
Average realisation(US$/tonne)
Zinc 2,081 2,280 2,439 7.0 17.2
Lead 2,401 2,346 2,438 3.9 1.5
Silver (INR) 44,348 41,667 38,780 -6.9 -12.6
Premiums
Zinc 205 254 362 42.4 76.4
Lead 336 217 318 46.7 -5.4
Exchange rate (INR/USD) 55.8 61.8 59.8 -3.1 7.2
Zinc cop rose 12% QoQ, dragging EBITDA margins down
Quarterly CoP /tonne
847 848 829 828 839 814 839
898
1,005
-
200
400
600
800
1,000
1,200
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15

3. 3
Valuations (INR mn)
FY16 EBITDA 71,916
Multiple 5.6
Enterprise Value 400,212
Net Debt (313,380)
Target Market capitalisation 713,592
O/S. Shares 4,225
Value per share INR 169
Our Assumptions - Revising volumes down, Raising Zinc price
Volumes (tons) FY13 FY14 FY15E FY16E
MIC 870,170 879,716 855,920 912,902
Zinc 674,958 750,766 712,981 760,447
Lead 117,445 121,120 125,820 134,197
Silver 374,000 352,000 323,221 381,767
Price (US$/ton)
Zinc - LME 1,968 1,934 2,075 2,125
Lead - LME 2,120 2,113 2,225 2,225
Silver (Rs/Kg) 56,193 45,455 45,200 44,070
USD/INR 54.40 60.40 59.40 59.00
Gross Avg. Asp & Premia (US$/ton)
Zinc 2,316 2,364 2,495 2,530
Premium 348 430 420 405
Lead 2,646 2,660 2,639 2,657
Premium 526 547 414 432
Peer Comparision - HZ, no longer an inexpensive stock when compared to global peers
Companies
Market Cap EV/EBITDA PE ROE
USD bn) CY 14/FY 15 CY 15/FY 16 CY 14/FY 15 CY 15/FY 16 CY 14/FY 15 CY 15/FY 16
Korea Zinc Co Ltd 7.62 7.8 6.1 13.5 10.2 11.8 13.9
Glencore PLC 84.30 8.2 7.4 13.1 11.0 11.7 12.5
Boliden AB 4.57 5.6 5.2 11.3 9.7 10.5 11.6
Teck Resources Ltd 13.69 6.7 5.9 16.4 12.6 4.4 6.0
Trevali Mining Corp 0.32 5.8 3.6 11.7 7.3 - -
Average 6.8 5.6 13.2 10.1 9.6 11.0

4. 4
Financials
Income StatementY
Y/E March (INR mn) FY13 FY14 FY15E FY16E
Net Sales 126,998 136,360 139,104 150,361
Growth in Sales (%) 11.35 7.37 2.01 8.09
Employees Cost -6,499 -6,801 -7,233 -7,819
Other Expenses -18,786 -21,812 -23,919 -26,383
Total Expenditure -62,182 -66,745 -70,210 -78,445
EBIDTA (without OI) 64,816 69,616 68,894 71,916
% Growth 6.79 7.40 -1.04 4.39
EBITDA Margin % 51.04% 51.05% 49.53% 47.83%
Depreciation/Amortization -6,470 -7,846 -8,092 -8,901
EBIT 78,668 80,764 84,802 87,515
EBIT Margin % 61.94 59.23 60.96 58.20
Interest Expense -291 -449 -304 -350
Other Income 20,322 18,994 24,000 24,500
Exceptionals -175 -617 0 0
EBT 78,201 79,698 84,498 87,165
Tax Expenses -9,206 -10,651 -12,675 -13,075
PAT 67,611 65,513 71,824 74,090
% Growth 12.70 -2.44 8.61 3.16
APAT Margin % 53.2 48.0 51.6 49.3
Balance Sheet
Y/E March (INR mn) FY13 FY14 FY15E FY16E
Sources of funds
Share capital 8,451 8,451 8,451 8,451
Reserves & Surplus 314,307 365,726 417,981 473,066
Total Networth 322,757 374,176 426,431 481,517
Total Debt 286 564 636 1,186
Other Long term Liabilites 12,799 16,581 14,521 15,436
Total Liabilities 335,842 391,321 441,589 498,139
Application of funds
Net Block 84,837 91,473 112,246 127,845
Capital Work-in-Progress 10,819 15,409 8,919 7,869
Investments 27 28 27 27
Total Current Assets 258,971 309,857 341,413 384,077
Total Current Liabilities 18,812 25,446 21,015 21,678
Net Current Assets 240,159 284,411 320,397 362,399
Total Assets 335,842 391,321 441,589 498,139
Cash Flow
Y/E March (INR mn) FY13 FY14 FY15E FY16E
Pre-tax profit 78,201 79,698 84,498 87,165
Depreciation 6,865 6,520 9,571 8,901
Chg in working capital -17,365 -5,672 1,106 -379
Total tax paid -7,496 -6,868 -14,735 -12,160
Other operating activities 0.0 0.0 0.0 0.0
Cash flow from operations (a) 60,205 73,678 80,441 83,527
Capital expenditure -12,943 -17,746 -23,854 -23,450
Chg in investments -1 -1 1 0
Cash flow from investing (b) -12,944 -17,747 -23,853 -23,450
Free cash flow (a+b) 47,261 55,930 56,589 60,077
Equity raised/(repaid) 0.0 0.0 0.0 0.0
Chg in minorities 0.0 0.0 0.0 0.0
Debt raised/(repaid) 110.8 277.5 72.5 550.0
Dividend (incl. tax) -12,276.9 -15,324.6 -17,547.9 -18,680.9
Other financing activities 222.0 0.0 0.0 0.0
Cash flow from financing (c) -11,944 -15,047 -17,475 -18,131
Net chg in cash (a+b+c) 35,317 40,883 39,113 41,946
Opening Cash 179,476 214,793 255,350 293,318
Closing Cash 214,793 255,350 293,318 335,265
Key Ratios
Y/E March FY13 FY14 FY15E FY16E
Per Share Data (INR)
Adj. EPS 16.0 15.7 17.0 17.5
Growth (%) 12.70 -2.44 8.61 3.16
CEPS 17.6 17.5 18.9 19.6
DPS 3.1 3.5 3.7 3.9
BVPS 76.4 88.6 100.9 114.0
Return Ratios (%)
RoACE 25.54 22.21 20.36 18.63
RoANW 22.92 18.98 17.94 16.32
Liquidity Ratios
Net Debt/Equity -66.46 -68.09 -68.64 -69.38
Interest Coverage Ratio 501.91 270.34 179.71 278.96
Current Ratio 13.77 12.18 16.25 17.72
Efficiency Ratios
Asset Turnover Ratio 0.39 0.35 0.32 0.31
Inventory Days 32 32 35 35
Debtor Days 12 11 15 13
Creditor days 28 28 22 21
Valuation Ratios
P/E(x) 10.3 10.5 9.7 9.4
P/BV (x) 2.2 1.9 1.6 1.4
P/CEPS (x) 9.4 9.4 8.7 8.4
Dividend Yield (%) 1.9% 2.1% 2.3% 2.3%
EV/Net Sales (x) 3.8 3.2 2.9 2.4
EV/EBIDTA(x) 7.4 6.4 6.1 5.3
Metal - Zinc

5. 5
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Metal - Zinc