Hindustan Zinc Ltd: Valuations compelling - BUY
CMP Rs116, Target Rs139, Upside 19.7%
CMP Rs116, Target Rs139, Upside 19.7%
Zinc market tightness to continue
The rise in Zinc prices has surprised us positively over the last one year and has outperformed other base metals during the same period. The tightness in the market was witnessed earlier than anticipated. We believe that the tight market condition in zinc global market would continue in 2014 as we estimate demand from the developed nations of US, Europe and Japan would be higher due to the on-going monetary easing in the regions. This coupled with steady demand from China and India would lead to a strong recovery in zinc demand. As a result, we raise our zinc price estimates for FY15 and FY16 to US$1,950/ton from our earlier estimate of US$1,850/ton.
The rise in Zinc prices has surprised us positively over the last one year and has outperformed other base metals during the same period. The tightness in the market was witnessed earlier than anticipated. We believe that the tight market condition in zinc global market would continue in 2014 as we estimate demand from the developed nations of US, Europe and Japan would be higher due to the on-going monetary easing in the regions. This coupled with steady demand from China and India would lead to a strong recovery in zinc demand. As a result, we raise our zinc price estimates for FY15 and FY16 to US$1,950/ton from our earlier estimate of US$1,850/ton.
Mined metal output growth to resume in FY15E
HZL's 9M FY14 mined metal output has been a tad lower than our estimate. The underperformance was due to the change in its mining strategy from Open pit to Underground at Rampura Agucha and also due to a change in mining sequence wherein preference was given to primary mine development. We believe that the company's mined metal output would increase with the ramp up of the underground mines at Rampura Agucha and higher contribution from the new mines at Zawar and Kayad. We expect mined metal output to increase to increase from 0.9mn tons in FY14 to 0.925mn tons in FY15 and 0.95mn tons in FY16.
HZL's 9M FY14 mined metal output has been a tad lower than our estimate. The underperformance was due to the change in its mining strategy from Open pit to Underground at Rampura Agucha and also due to a change in mining sequence wherein preference was given to primary mine development. We believe that the company's mined metal output would increase with the ramp up of the underground mines at Rampura Agucha and higher contribution from the new mines at Zawar and Kayad. We expect mined metal output to increase to increase from 0.9mn tons in FY14 to 0.925mn tons in FY15 and 0.95mn tons in FY16.
Valuations compelling; Maintain BUY
We believe going ahead earnings for the company would receive a boost from the increase in mined metal output, firm zinc & lead prices and higher operational efficiencies. We expect HZL to witness earnings CAGR of 4.3% over the period FY13-16 even on our assumption of a stronger rupee in FY16. At the CMP, the stock is trading at 6.4x P/E and 2.3x EV/EBIDTA on FY15E, which is lower than the range of its international peers. Current cash and cash equivalents of Rs240bn (48% of current mcap) is expected to rise to Rs370bn (75% of mcap). We believe downside from current levels is limited and maintain our BUY recommendation with a price target of Rs139.
We believe going ahead earnings for the company would receive a boost from the increase in mined metal output, firm zinc & lead prices and higher operational efficiencies. We expect HZL to witness earnings CAGR of 4.3% over the period FY13-16 even on our assumption of a stronger rupee in FY16. At the CMP, the stock is trading at 6.4x P/E and 2.3x EV/EBIDTA on FY15E, which is lower than the range of its international peers. Current cash and cash equivalents of Rs240bn (48% of current mcap) is expected to rise to Rs370bn (75% of mcap). We believe downside from current levels is limited and maintain our BUY recommendation with a price target of Rs139.
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