Hindustan Zinc, 1Q FY 2014

1QFY2014 Result Update | Base Metals
July 19, 2013
Hindustan Zinc
Performance Highlights
Quarterly highlights (Standalone) Particulars (` cr) 1QFY14 Net sales 2,939 EBITDA 1,503 EBITDA margin (%) 51.1 Adjusted PAT 1,661
Source: Company, Angel Research
BUY
CMP Target Price
% chg (yoy) 8.4 5.2 (153)bp 5.0 4QFY13 3,850 2,116 55.0 2,183 % chg (qoq) (23.7) (29.0) (382)bp (23.9)
`104 `140
12 months
1QFY13 2,713 1,429 52.7 1,581
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code
Base Metals 44,028 (22,365) 1.0 147/96 110,572 2 20,150 6,029 HZNC.BO HZ@IN
Hindustan Zinc (HZL)s 1QFY2014 results were in-line with our expectations. We maintain our Buy recommendation. Strong growth in zinc and silver volumes: HZLs net sales increased by 8.4% yoy to `2,939cr (in-line with our estimate of `2,916cr), mainly due to increased sales volumes of zinc and silver. Refined zinc production volumes increased 10.0% yoy to 173kt and refined silver production volumes grew 31.0% yoy to 96kt due to higher production from Sindesur Khurd mine and new Dariba lead and silver capacities. EBITDA up 5.2% yoy: HZLs EBITDA margin contracted by 153bp yoy to 51.1%
mainly on account of a 2.0% yoy increase in cost of production to `46,765/tonne. The cost of production increased primarily due to lower sulphuric acid credits and higher excavation costs, although these were partially offset by a lower price of coal, lower specific coal consumption and benefits accruing out of higher volumes.
PAT rises by 5.0% yoy: The companys other income rose by 8.0% yoy to
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 64.9 1.9 1.6 31.6
`620cr while depreciation increased by 6.3% yoy to `184cr. There was an exceptional item of VRS of `1cr and consequently, the adjusted net profit grew by 5.0% yoy to `1,661cr (above our estimate of `1,617cr).
Outlook and valuation: With a cash-rich balance sheet and strong production growth of zinc, lead and silver over FY2013-15, we maintain our positive stance on HZL. While we expect earnings to decline slightly during FY2014, we expect them to be higher in FY2015 on the back of improvement in both, realizations as well as volumes. HZL is currently trading at an inexpensive valuation of 2.8x and 1.8x FY2014E and FY2015E EV/EBITDA, respectively. Valuing the stock at 4.0x FY2015E EV/EBITDA, we recommend a Buy on HZL with a target price of `140. Key financials (Standalone)
Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Abs. (%) Sensex Hindustan Zinc
3m 6.0
1yr 16.6
3yr 12.4 6.4
(5.4) (12.4)
FY2012 11,255 12.1 5,569 13.2 13.1 52.6 8.0 1.6 22.4 21.2 2.3 4.4
FY2013 12,526 11.3 6,917 24.2 16.3 50.4 6.4 1.4 23.3 19.0 1.8 3.6
FY2014E 12,389 (1.1) 6,437 (6.9) 15.2 48.5 6.8 1.2 18.5 15.2 1.4 2.8
FY2015E 13,093 5.7 7,179 11.5 17.0 51.7 6.1 1.0 17.9 15.0 0.9 1.8
Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 Bhaveshu.chauhan@angelbroking.com
Vinay Rachh
Tel: 022- 39357800 Ext: 6841 Vinay.rachh@angelbroking.com
Please refer to important disclosures at the end of this report
Hindustan Zinc | 1QFY2014 Result Update
Exhibit 1: 1QFY1014 Performance (Standalone)

(` cr) Net sales Mining and manufacturing expenses % of Net sales Mining royalty % of Net sales Staff cost % of Net sales Admin, selling and others % of Net sales Total expenditure % of Net sales Other operating income EBIDTA % of Net sales Interest Depreciation Other income Exceptional items Profit before tax % of Net sales Provision for tax % of PBT Profit after tax % of Net sales Adjusted net profit
1QFY14 2,939 898 30.6 253 8.6 178 6.1 152 5.2 1,481 50.4 45 1,503 51.1 11 184 620 1 1,928 65.6 267 13.9 1,660 56.5 1,661
1QFY13 2,713 863 31.8 204 7.5 149 5.5 103 3.8 1,319 48.6 35 1,429 52.7 13 173 574 0 1,817 67.0 235 13.0 1,581 58.3 1,581
yoy % 8.4 4.1 23.8 19.4 47.5 12.3 27.7 5.2 (15.1) 6.3 8.0 6.1 13.5 5.0 5.0
4QFY13 3,850 1,168 30.3 244 6.3 177 4.6 204 5.3 1,793 46.6 58.4 2,116 55.0 11 122 412 18 2,378 61.7 212 8.9 2,166 56.3 2,183
qoq % (23.7) (23.1) 3.7 0.7 (25.7) (17.4) (23.3) (29.0) 1.0 51.2 50.6 (18.9) 26.1 (23.3) (23.9)
FY2013 12,526 3,450 27.5 920 7.3 650 5.2 518 4.1 5,538 44.2 174 6,482 51.7 29 647 2,032 18 7,820 62.4 921 11.8 6,899 55.1 6,917
FY2012 11,255 3,230 28.7 838 7.4 535 4.8 421 3.7 5,024 44.6 150 6,069 53.9 14 611 1,543 43 6,945 61.7 1,419 20.4 5,526 49.1 5,569
yoy % 11.3 6.8 9.8 21.6 23.1 10.2 16.0 6.8 108.6 6.0 31.7 12.6 (35.1) 24.9 24.2
Exhibit 2: Actual vs Estimates
(` cr) Net Sales EBITDA EBITDA margin (%) Adjusted PAT

Actual 2,939 1,503 51.1 1,661
Estimates 2,916 1,563 53.6 1,617
Variation (%) 0.8 (3.8) (247)bp 2.7
Strong growth in zinc and silver volumes

For 1QFY2014, HZLs net sales increased by 8.4% yoy to `2,939cr (in-line with
our estimate of `2,916cr), mainly due to increased sales volumes of zinc and silver. Refined zinc production volumes increased 10.0% yoy to 173kt and refined silver production volumes grew 31.0% yoy to 96kt due to higher production from Sindesur Khurd mine and new Dariba lead and silver capacities.
July 19, 2013
Exhibit 3: Net sales rose by 8.4% yoy

4,500 4,000 3,500 3,000 2,821 2,593 2,747 3,094 2,713 2,822 3,140 3,850 2,939 130 110 90
(` cr)
2,000 1,500 1,000 500 0 1QFY12 3QFY12 1QFY13 3QFY13 Net sales yoy growth - RHS 1QFY14
50 30 10 (10)
EBITDA increases 5.2% yoy

The EBITDA margin contracted by 153bp yoy to 51.1% mainly on account of a 2.0% yoy increase in the cost of production to `46,765/tonne. Cost of production increased primarily due to lower sulphuric acid credits and higher excavation costs, although these were partially offset by a lower price of coal, lower specific coal consumption and benefits accruing out of higher volumes. Mining royalty as a percentage to sales increased to 8.6% compared to 7.5% in 1QFY2013 while other operating income also increased by 27.7% yoy to `45cr. Hence, the EBITDA increased by 5.2% yoy to `1,503cr.
PAT rises by 5.0% yoy

The other income rose by 8.0% yoy to `620cr while depreciation increased by 6.3% yoy to `184cr. The tax rate was at 13.9% in 1QFY2014 (13.0% in 1QFY2013). There was an exceptional item of VRS of `1cr and consequently, the adjusted net profit grew by 5.0% yoy to `1,661cr (above our estimate of `1,617cr).
Exhibit 4: EBITDA and EBITDA margin trend

2,400 2,100 1,800 1,500 1,592 1,465 1,402 1,659 1,429 1,447 1,494 1,503 2,116 60
Exhibit 5: Net profit and net profit margin trend

2,400 2,100 1,800 1,500 1,499 1,369 1,280 1,421 1,581 1,544 1,613 2,183 1,661 70 60 50 40 30 20 10 0 1QFY12 3QFY12 Net profit (LHS) 1QFY13 3QFY13 1QFY14 Net profit margins (RHS)
( ` cr)
( ` cr)
(%)
1,200 900 600 300 0 1QFY12 3QFY12 EBITDA (LHS) 1QFY13 3QFY13 1QFY14 EBITDA margins (RHS)
900 600 300 40 0
July 19, 2013
(%)
1,200
(%)
2,500
70
Investment arguments
Mining in Kayad could be the next phase of growth
Since the expansion at Sindesur Khurd is complete, HZL has commenced work at its underground Kayad mine, which has 11mn tonne of high-grade reserves. The company expects to increase its capacity from 1.0mn tonne to 5mn tonne over the coming five years. Moreover, given the cash-rich balance sheet, HZL is actively exploring greenfield projects through prospecting licenses and mining lease projects across different states.
Current zinc prices near marginal cost of production

At current levels of ~US$1,900/tonne, zinc prices stand near marginal cost of production for several zinc producers globally. Hence, we believe that the probability of a further decline in zinc prices from the current levels remains muted. Further, over the next 3-5 years, several zinc mines are expected to be exhausted; hence, production is likely to suffer. This should support zinc prices over the medium term in our view.
July 19, 2013
Outlook and Valuation

With a cash-rich balance sheet and strong production growth of zinc, lead and silver over FY2013-15, we maintain our positive stance on HZL. While we expect earnings to decline slightly during FY2014, we expect them to be higher in FY2015 on the back of improvement in both, realizations as well as volumes. HZL is currently trading at an inexpensive valuation of 2.8x and 1.8x FY2014E and FY2015E EV/EBITDA, respectively. Valuing the stock at 4.0x FY2015E EV/EBITDA, we recommend Buy on HZL with a target price of `140.
Exhibit 6: Key assumptions

LME prices (US$/tonne) Zinc Lead Silver (`/kg) Sales volume (tonnes) Zinc metal Lead metal Integrated silver Source: Angel Research FY2014E FY2015E
1,875 2,013 40,000 725,605 138,750 337,000
1,930 2,068 40,000 747,150 142,450 347,000
Exhibit 7: EPS Angel forecast vs consensus

Year (%) FY2014E FY2015E
Source: Bloomberg, Angel Research
Angel forecast
15.2 17.0
Bloomberg consensus 16.3 16.9
Variation (%)
(6.5) 0.5
Exhibit 8: EV/EBITDA band

70,000 60,000 50,000
(` cr)
40,000 30,000 20,000 10,000 0
July 19, 2013
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13
2x 4x 6x 8x 10x
Exhibit 9: P/E band

250 200 150
(` )
100 50 0
Exhibit 10: P/BV band

500 450 400 350 300 250 200 150 100 50 0
(` )
Exhibit 11: Recommendation summary

Company Hindalco Nalco Sterlite HZL CMP Target Price (`) 104 30
83
Reco.
Mcap Upside (` cr) (%) 20
(`) 100
FY14E FY15E FY14E FY15E 7.9 11.8

4.7
Neutral 20,270
Neutral 7,641
Buy 27,860
104
140
Buy
44,028
34
6.8
Company background
Incorporated in 1966, HZL, a subsidiary of Sterlite Industries, is a vertically integrated company with its mining and smelting operations located mainly in Rajasthan and Andhra Pradesh. HZLs current zinc reserves stand at 34.1mn tonne with a production capacity of 1.1mn tonne of zinc p.a., indicating a mine life of 31 years. HZL currently operates two underground mines, namely Sindesar Khurd and Rajpura Dariba, and one open cast mine - Rampura Agucha.
July 19, 2013
0.5x 2.0x 3.5x 5.0x
2.0x 6.0x 10.0x 14.0x
P/E (x) 7.1 11.4

4.2
P/BV (x) 0.5 0.6

0.5 1.2
EV/EBITDA (x) 6.5 3.4

2.1 2.8
RoE (%) 7.2 5.4

10.9 18.5
RoCE (%) 5.4 3.4

8.0 15.2
FY14E FY15E FY14E FY15E FY14E FY15E 5.8 3.4

1.7 1.8
0.5 0.6
0.4 1.0
7.5 5.5
11.1 17.9
5.5 3.5
8.2 15.0
6.1
Profit & loss statement (Standalone)

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other Mfg. costs Personnel Other EBITDA % chg (% of Net sales) Depreciation EBIT % chg (% of Net sales) Interest & other charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extraordinary inc/(exp.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg
previous year numbers
FY2010 8,017 122.0 8,139 43.3 3,347 1,961 613 457 316 4,792 75.3 58.3 334 4,458 82.0 55.6 44 600 12.0 5,014 49.3 5,014 973 19.4 4,041 4,041 48.2 49.7 9.6 9.6 48.2
FY2011 10,039 0 10,039 23.3 4,431 14 803 511 3,104 5,608 17.0 55.9 475 5,133 15.1 51.1 18 866 14.5 5,981 19.3 21.2 5,960 1,059 17.8 4,900 4,922 21.8 49.0 11.6 11.6 21.3
FY2012 11,255 150 11,405 13.6 5,336 312 838 535 3,651 6,069 8.2 52.6 611 5,459 6.3 48.5 14 1,543 22.1 6,988 16.8 43.1 6,945 1,419 20.4 5,526 5,569 13.2 48.8 13.1 13.1 12.8
FY2013 12,526 174 12,700 11.4 6,218 681 920 650 3,968 6,482 6.8 50.4 647 5,835 6.9 46.6 29 2,032 25.9 7,838 12.2 17.5 7,820 921 11.8 6,899 6,917 24.2 54.5 16.3 16.3 24.9
FY2014E 12,389 186 12,575 (1.0) 6,383 0 867 726 4,791 6,192 (4.5) 48.5 719 5,473 (6.2) 44.2 44 2,166 28.5 7,595 (3.1) 7,595 1,158 15.2 6,437 6,437 (6.9) 51.2 15.2 15.2 (6.7)
FY2015E 13,093 205 13,298 5.8 6,320 314 887 797 4,321 6,978 12.7 51.7 790 6,188 13.1 47.3 13 2,296 27.1 8,471 11.5 8,471 1,292 15.2 7,179 7,179 11.5 54.0 17.0 17.0 11.5
Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with
July 19, 2013
Balance sheet (Standalone)
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Other long term liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Long term loans and adv. Other Non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets
FY2010 423 17,701 18,124 60 711 18,896 8,241 2,077 6,164 1,113 10,949
FY2011 845 21,688 22,533 0.4 945 24 23,502 9,879 2,624 7,254 595 9,335 617 130
FY2012 845 26,036 26,881 0.4 1,109 17 28,008 11,658 3,145 8,513 445 12,695 876 15 6,942 5,255 233 1,453 1,477 5,465 28,008
FY2013 845 31,431 32,276 0.4 1,280 28 33,584 12,281 3,797 8,484 1,082 14,540 1,898 239 9,223 6,942 393 1,887 1,881 7,341 33,584
FY2014E 845 36,335 37,180 0.4 1,280 28 38,489 13,981 4,516 9,465 1,032 14,540 1,898 239 14,090 12,539 393 1,158 2,775 11,315 38,489
FY2015E 845 41,982 42,827 0.4 1,280 28 44,136 15,681 5,306 10,375 982 14,540 1,898 239 18,871 17,336 393 1,142 2,769 16,102 44,136
1,995 928 457 611 1,326 669 18,896
7,123 5,633 286 1,204 1,551 5,572 23,502
Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with previous year numbers
July 19, 2013
Cash flow statement( Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in net fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and adv. Other income Cash flow from investing Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal.
previous year numbers
FY2010 FY2011 FY2012 5,014 335 173 (563) 785 4,173 (3,922) (96) 5,960 475 (239) 1,116 4,244 6,945 611 (61) 1,502 4,492
FY2013 FY2014E FY2015E 7,820 647 (87) 1,606 4,848 (1,753) (628.6) (96.0) (852.6) (3,330) 1,228 29 (1,257) 261 29 6,942 7,595 719 1,624 1,158 8,779 (1,650) (1,650) 1,532 (1,532) 5,597 6,942 12,539 8,471 790 9 1,292 7,979 (1,650) (1,650) 1,532 (1,532) 4,797 12,539 17,336
(835) (1,501) (1,926.9)
(2,247) (1,446) (1,668) 1,870 (2,455) 28 38 624 1,228 14 (210) 277 29
2,288 (4,082) 43 198 33 (187) 8 2,719 928 (60) 296 8 250 28 277
(3,977) (3,631) (3,461)
(363) (1,242)
Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with
July 19, 2013
Key ratios (Standalone)

Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage (0.7) (2.5) 101.5 (0.7) (2.7) 280.8 (0.7) (3.0) 391.3 (0.7) (3.3) 200.5 (0.7) (4.4) 125.1 (0.7) (4.6) 472.6 1.1 23 7 46 (4) 1.1 22 7 39 (6) 1.0 25 9 36 2 1.0 28 9 36 9 0.9 28 9 36 (12) 0.9 28 8 36 (34) 26.4 88.5 24.9 24.2 74.3 24.1 21.2 62.3 22.4 19.0 56.7 23.3 15.2 51.3 18.5 15.0 57.3 17.9 55.6 80.6 1.3 59.3 59.3 51.1 82.2 1.3 54.4 54.4 48.5 79.6 1.2 47.5 47.5 46.6 88.2 1.1 47.2 47.2 44.2 84.8 1.1 40.1 40.1 47.3 84.8 1.1 45.1 45.1 9.6 9.6 10.4 6.0 42.9 11.6 11.6 12.8 0.7 53.3 13.1 13.1 14.6 2.4 63.6 16.3 16.3 17.9 3.1 76.4 15.2 15.2 16.9 3.1 88.0 17.0 17.0 18.9 3.1 101.4 10.9 10.0 2.4 5.8 4.0 6.9 1.7 9.0 8.1 2.0 0.7 2.9 5.2 1.2 8.0 7.1 1.6 2.3 2.3 4.4 0.9 6.4 5.8 1.4 3.0 1.8 3.6 0.7 6.8 6.1 1.2 3.0 1.4 2.8 0.4 6.1 5.5 1.0 3.0 0.9 1.8 0.3 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E
Note: Some of the figures from FY2011 onwards are reclassified; hence some ratios may not be comparable with previous year ratios
July 19, 2013
10
Research Team Tel: 022 - 39357800
E-mail: research@angelbroking.com
Website: www.angelbroking.com
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Hindustan Zinc No No No No
Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.
Ratings (Returns):
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
July 19, 2013
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1QFY2014 Result Update | Base Metals

July 19, 2013

1QFY13 2,713 1,429 52.7 1,581

Abs. (%) Sensex Hindustan Zinc

3yr 12.4 6.4

Please refer to important disclosures at the end of this report