2QFY2016 Result Update | Metals/Mining

October 26, 2015

Hindustan Zinc

ACCUMULATE

CMP

`158

Volume growth drives outperformance

Target Price

`175

Investment Period

12 Months

Standalone (` cr)

2QFY16

2QFY15

yoy (%)

1QFY16

qoq%

Net revenue

3,908

3,749

4.2

3,596

8.7

Stock Info

EBITDA

2,164

1,997

8.4

1,660

30.3

Sector

Metals/Mining

Margin (%)

55.4

53.3

212bp

46.2

920bp

Market Cap (` cr)

66,548

Reported PAT

2,285

2,184

4.7

1,921

19.0

Net Cash (` cr)

34,568

Source: Company, Angel Research

Beta

0.9

For 2QFY2016, Hindustan Zinc (HZL) reported a 4% increase in revenue at

52 Week High / Low

190/117

`3,908cr (~6% ahead of our estimate of `3,693cr). The outperformance was led

Avg. Daily Volume

10,21,013

by better than expected volumes with refined zinc production at 211,000MT,

Face Value (`)

increasing 17% yoy. The EBITDA came in at `2,164cr, 16% ahead of our estimate

BSE Sensex

27,471

of `1,874cr, led by better than expected revenue growth. The EBITDA increased

Nifty

8,295

8% yoy and was up 30% sequentially. The EBITDA margin improved 212bp yoy at

Reuters Code

HZNC.BO

55.4% and was 463bp higher than our expectation. Depreciation and finance

Bloomberg Code

HZ IN

expenses were in line with our expectations. The Net profit increased 5% yoy to

`2,285cr and was 15% ahead of our expectation.

Shareholding Pattern (%)

HZL’s Management has guided at a ~16% increase in refined metal production

Promoters

64.9

volumes in FY2016, led by the strong performance of 2QFY2016. The

MF / Banks / Indian Fls

31.2

Management also indicated that the expansion projects remain on track, which

FII / NRIs / OCBs

1.9

should help the company drive volumes.

Indian Public / Others

2.0

Outlook and valuation: We expect zinc prices to continue its decline going

forward led by global headwinds. We however have increased our volume

estimates led by the strong outperformance in 2QFY2016. We raise our FY2016

Abs. (%)

3m 1yr

3yr

and FY2017 estimates in view of the better than expected volumes and operating

Sensex

(3.2)

2.3

46.8

leverage potential. The stock is currently trading at 4x FY2017E EV/EBITDA. We

HZL

(5.0)

(4.7)

19.6

value the stock at 5x FY2017E EV/EBITDA and arrive at a target price of `175.

We upgrade our recommendation on the stock to Accumulate.

3-year price chart

Key financials (Standalone)

200

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E

FY2017E

150

Revenue

12,700

13,636

14,788

14,641

14,026

100

% chg

11.4

7.4

8.5

(1.0)

(4.2)

Adj. net profit

6,064

6,059

6,448

7,458

6,761

% chg

19.8

(0.1)

6.4

15.7

(9.3)

Adj. EPS (`)

14.4

14.3

15.3

17.7

16.0

OPM (%)

51.1

50.6

50.2

50.4

Source: Company, Angel Research

P/E (x)

9.6

8.1

8.9

9.8

P/BV (x)

2.1

1.8

1.5

1.4

1.2

RoE (%)

23.3

19.8

20.2

16.2

13.2

RoCE (%)

19.8

17.5

16.8

14.3

12.1

Rahul Dholam

EV/Sales (x)

3.5

3.0

2.4

2.2

2.0

Tel: 022- 3935 7800 Ext: 6847

EV/EBIDTA

6.9

5.9

4.8

4.3

4.0

[email protected]

Source: Company, Angel Research: Note CMP as of October 23, 2015

Please refer to important disclosures at the end of this report

Hindustan Zinc | 2QFY2016 Result Update

Exhibit 1: 2QFY2016 performance (Standalone)

(` cr)

2QFY16

2QFY15

yoy%

1QFY16

qoq%

FY2015

FY2014

yoy%

Net sales

3,908

3,749

4.2

3,596

8.7

14,788

13,636

8.5

Other operating income

125

135.2

263.7

Revenue

4,033

3,802

6.1

3,630

11.1

14,788

13,636

8.5

Manufacturing exp.

675

602

12.1

499

35.4

5,375

5,134

4.7

% of net sales

17.3

16.1

13.9

36.3

37.6

Selling & admin exp.

306

303

1.1

629

(51.3)

1,919

1,557

23.2

% of net sales

7.8

8.1

17.5

13.0

11.4

Other expenditure

888

901

(1.4)

842

5.4

71.4

% of net sales

22.7

24.0

23.4

0.5

0.3

Total expenditure

1,869

1,806

3.5

1,970

(5.1)

7,372

6,736

9.4

% of net sales

47.8

48.2

54.8

49.8

49.4

EBITDA

2,164

1,997

8.4

1,660

30.3

7,417

6,900

7.5

Margin (%)

55.4

53.3

212bp

46.2

920bp

50.2

50.6

477bp

Interest

(7.6)

(24.8)

(47.7)

Depreciation

175

206

(15.1)

173

1.2

644

785

(17.9)

Other income

869

697

24.7

564

54.1

2,821

1,899

48.5

Profit before tax

2,857

2,486

14.9

2,050

39.4

9,570

7,970

20.1

% of net sales

73.1

66.3

57.0

64.7

58.4

Tax

572

302

129

1,392

1,065

30.7

% of PBT

20.0

12.2

6.3

14.5

13.4

Reported net profit

2,285

2,184

4.7

1,921

19.0

8,178

6,905

18.4

Adjusted Net Profit

2,285

2,186

4.5

1,921

19.0

6,448

6,059

6.4

Source: Company, Angel Research

Exhibit 2: 2QFY2016 Actual vs. estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

3,908

3,693

5.8

EBITDA

2,164

1,874

15.5

EBITDA margin (%)

55.4

50.7

463bp

Source: Company, Angel Research

Result highlights

Better than expected volumes drive revenue

HZL reported a 4% increase in revenue at `3,908cr, ~6% ahead of estimate of

`3,693cr. The outperformance was led by better than expected volumes with

refined zinc production at 211,000MT, increasing by 17% yoy, during the quarter.

Refined lead and silver production also surprised positively. Refined lead

production increased 33% yoy to 40,000MT, while refined silver production

jumped 40% yoy to 112,000MT. Mined metal production increased 13% yoy to

240,000MT. Global prices have declined ~20-25% for all the three metals over

the last year, resulting in lower realizations for HZL. However, volume growth has

more than offset the fall in realizations owing to decline in metal prices, thereby

resulting in increase in revenue, as against an expectation of a revenue decline.

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Exhibit 3: Strong volume growth drives revenue growth

Exhibit 4: Mined metal production (MT)

400

300

269

350

238

242

240

250

232

300

222

220

213

200

250

200

163

200

150

100

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Zinc

Refined Lead

Refined Saleable Silver

Source: Company, Angel Research

The EBITDA for the quarter, at `2,164cr, came in 16% ahead of our expectation of

`1,874cr, led by higher than expected revenue growth. The EBITDA increased

8% yoy and was up 30% sequentially. The EBITDA margin improved 212bp yoy at

55.4% and was 463bp higher than our expectation. Depreciation and finance

expenses came in in line with our expectations. The Net profit increased 5% yoy to

`2,285cr and was 15% ahead of our expectation.

Exhibit 5: EBITDA Margin jumps 212bp yoy

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

EBITDA (` Cr)

1506

1904

1828

1736

1352

2000

2089

1978

1672

2188

Margin (%)

51%

54%

53%

48%

46%

53%

55%

49%

47%

56%

Source: Company, Angel Research

Exhibit 6: Zinc & Lead Prices decline ~20% yoy

Exhibit 7: Silver prices have halved in the last few years

2500

2300

2100

1900

1700

1500

Zinc

Lead

Source: Company, Angel Research

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Investment arguments

Volume growth to remain strong

HZL’s Management has guided for a ~16% increase in refined metal production

volumes in FY2016, led by the strong performance in 2QFY2016. The

Management expects total integrated silver production to be 375,000MT in

FY2016. The Management also indicated that the expansion projects remain on

track, which should help the company drive volumes. Rampura Agucha open pit

deepening project to de-risk the transition to underground mining remains on

track. The company has received environment clearance for deepening of pit by

another 50meters, to an ultimate depth of 420meters. The pre-stripping work

made impressive progress during the quarter and the main shaft sinking is

progressing as per the devised plan. At Sindesar Khurd, the company plans to

increase ore production capacity by 50% from 2MMT to 3MMT by the year-end.

The ramp up of Kayad mine also remains ahead of schedule and the company

expects to achieve 1MMT production capacity by the year-end. The Management

has kept the capex guidance unchanged at ~$200-$225mn, including sustenance

capex. We expect the capacity expansions to help the company nearly offset the

pressure from falling realizations.

Zinc prices may continue to remain under pressure

We believe with the slowdown in China and in overall steel demand, it will be

difficult for zinc prices to firm up over the coming years. Our outlook for zinc prices

continues to remain negative and we are not factoring any improvement in prices

over FY2015-17, leading to a 1%/4% decline in revenue in FY2016 and FY2017,

respectively. Led by the decline in revenue, we expect the EBITDA to decline by

~0.5%/4.2% in FY2016 and FY2017, respectively.

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Outlook and valuation

We expect zinc prices to continue its decline going forward led by global

headwinds. We have however increased our volume estimates, led by the strong

outperformance during 2QFY2016. We raise our FY2016 and FY2017 estimates

in view of the better than expected volumes and operating leverage potential. The

stock is currently trading at 4x FY2017E EV/EBITDA. We value the stock at 5x

FY2017 EV/EBITDA and arrive at a target price of `175. We upgrade our

recommendation on the stock to Accumulate.

Exhibit 12: Valuation

(` cr)

FY2017E Adj. EBITDA

7,070

Multiple (x)

Total EV

35,349

Net Cash

38,394

Equity Value

73,744

Target price (`)

175

Source: Angel Research

Company background

Hindustan Zinc is one of the world's largest integrated producers of zinc and is

among the leading global lead and silver producers. With reserves and resources

of 375.1mn tonne, the company is one of the lowest cost producers in the world

and is well placed to serve the growing demand in Asia. Hindustan Zinc is a

subsidiary of the London listed diversified metals and mining major, Vedanta

Resources plc.

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Profit & Loss Statement (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E

FY2017E

Net Sales

12,700

13,636

14,788

14,641

14,026

Other operating income

Total operating income

12,700

13,636

14,788

14,641

14,026

% chg

11.4

7.4

8.5

(1.0)

(4.2)

Total Expenditure

6,209

6,736

7,372

7,257

6,956

Manufacturing Expenses

4,753

5,134

5,375

5,349

5,125

Selling & General Exp.

1,338

1,557

1,919

1,830

1,753

Other Expenses

118

EBITDA

6,491

6,900

7,417

7,383

7,070

% chg

7.7

6.3

7.5

(0.5)

(4.2)

(% of Net Sales)

51.1

50.6

50.2

50.4

Depreciation& Amort.

647

785

644

803

878

EBIT

5,844

6,115

6,773

6,581

6,192

% chg

7.9

4.6

10.7

(2.8)

(5.9)

(% of Net Sales)

46.0

44.8

45.8

44.9

44.2

Interest & other Charges

Other Income

2,003

1,899

2,821

2,539

2,285

Profit before tax

7,820

7,970

9,570

9,095

8,451

% chg

12.6

1.9

20.1

(5.0)

(7.1)

Tax Expense

921

1,065

1,392

1,637

1,690

(% of PBT)

11.8

13.4

14.5

18.0

20.0

Recurring PAT

6,899

6,905

8,178

7,458

6,761

Adjusted PAT

6,064

6,059

6,448

7,458

6,761

% chg

19.8

(0.1)

6.4

15.7

(9.3)

(% of Net Sales)

47.7

44.4

43.6

50.9

48.2

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Balance Sheet (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E FY2017E

SOURCES OF FUNDS

Equity Share Capital

845

Reserves & Surplus

31,431

36,573

42,508

47,980

52,629

Shareholders Funds

32,276

37,418

43,353

48,825

53,474

Total Loans

Deferred Tax Liability

1,280

1,658

2,519

2,997

3,314

Other Long term liabilities

132

152

182

Total Liabilities

33,584

39,132

46,004

51,974

56,969

APPLICATION OF FUNDS

Gross Block

12,281

13,600

14,551

16,051

17,551

Less: Acc. Depreciation

3,797

4,453

5,104

5,907

6,784

Net Block

8,484

9,147

9,446

10,144

10,766

Capital Work-in-Progress

1,082

1,541

2,005

2,105

2,210

Investments

14,540

22,506

27,254

31,342

35,103

Current Assets

9,222

5,543

5,950

6,321

5,957

Cash

6,942

3,031

3,532

3,582

3,292

Inventories

1,111

1,198

1,212

1,464

1,403

Debtor

403

400

659

732

701

Other

766

914

548

543

561

Current liabilities

1,882

2,545

2,988

2,708

2,314

Net Current Assets

7,341

2,998

2,962

3,612

3,642

Other Assets

2,137.5

2,939.4

4,337.3

4,771.1

5,248.2

Total Assets

33,584

39,132

46,004

51,974

56,969

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Cash flow statement (Standalone)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016E FY2017E

Profit before tax

7,820

7,970

9,570

9,095

8,451

Depreciation

647

785

645

803

878

Change in Working Capital

(984)

(505)

(187)

(600)

(320)

Others

(1,087)

(1,133)

(2,463)

(414)

(447)

Direct taxes paid

(1,611)

(1,645)

(2,033)

(1,159)

(1,373)

Cash Flow from Operations

4,785

5,471

5,531

7,725

7,189

(Inc.)/ Dec. in Fixed Assets

(1,753)

(1,709)

(1,611)

(1,600)

(1,605)

(Inc.)/ Dec. in Investments

(629)

(6,825)

(2,285)

(4,088)

(3,761)

Others

(888)

4,578

Cash Flow from Investing

(3,269)

(3,955)

(3,807)

(5,688)

(5,366)

Issue of Equity

Inc./(Dec.) in loans

Dividend Paid (Incl. Tax)

(1,228)

(1,532)

(1,879)

(1,986)

(2,113)

Others

(27)

(45)

(24)

Cash Flow from Financing

(1,255)

(1,577)

(1,902)

(1,986)

(2,113)

Inc./(Dec.) in Cash

261

(62)

(178)

(290)

Opening Cash balances

290

228

3,532

3,582

Closing Cash balances

290

228

3,582

3,292

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Key ratios

Y/E March

FY2013

FY2014

FY2015

FY2016E

FY2017E

Per Share Data (`)

Reported EPS

16.3

19.4

17.7

16.0

Adjusted EPS

14.4

14.3

15.3

17.7

16.0

Cash EPS

17.9

18.2

20.9

19.5

18.1

DPS

3.1

3.5

4.4

4.7

5.0

Book Value

76.4

88.6

102.6

115.6

126.6

Valuation Ratio (x)

P/E (on FDEPS)

9.6

8.1

8.9

9.8

P/CEPS

8.8

8.7

7.5

8.1

8.7

P/BV

2.1

1.8

1.5

1.4

1.2

Dividend yield (%)

2.0

2.2

2.8

3.0

3.2

EV/Sales

3.5

3.0

2.4

2.2

2.0

EV/EBITDA

6.9

5.9

4.8

4.3

4.0

EV/Total Assets

1.3

1.0

0.8

0.6

0.5

Returns (%)

ROCE

19.8

17.5

16.8

14.3

12.1

ROE

23.3

19.8

20.2

16.2

13.2

Turnover ratios (x)

Asset Turnover (Gross Block)

1.1

1.0

0.8

Inventory (days)

27.4

30.9

29.7

33.4

37.3

Receivables (days)

10.6

10.7

13.1

17.3

18.7

Payables (days)

48.3

59.2

68.3

71.0

65.4

WC cycle (ex-cash) (days)

8.7

4.9

(7.4)

(6.7)

5.0

Solvency ratios (x)

Net debt to equity

(0.2)

(0.1)

Net debt to EBITDA

(3.3)

(3.7)

(4.2)

(4.7)

(5.4)

October 26, 2015

Hindustan Zinc | 2QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with

CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is

a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

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

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the merits and risks of such an investment.

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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

Hindustan Zinc

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

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

October 26, 2015