We maintain our ‘buy’ rating on Hindustan zinc (HZL) and revise our target price to R174 from R177. In our view, the outlook and valuations remain attractive. At the current market price, the stock trades at an inexpensive valuation of 2.9x FY16e EV/Ebitda.
HZL guided for mined metal production of 9.1-9.2 lakh tonne in FY15 and 1 million tonne in FY16. Accordingly, we lower FY15 mined metal volume assumption by 7% to 9.1 lakh tonne from 9.75 lakh tonne, and FY16 volume assumption by 1.5% to 9.6 lakh tonne from 9.75 lakh tonne. This leads us to cut FY15 and FY16 Ebitda estimates by 5% and 1%, respectively. The company’s mine development expense is expected to double in FY15, but our estimates already factor in higher costs.
We remain positive due to volume growth (albeit back-ended) and firm zinc-lead prices despite the marginal decline in estimates.
HZL Q4FY14 Ebitda at R1,760 crore (down 17% y-o-y, 4% q-o-q) missed our R1,840-crore estimate due to higher-than-expected mine development expense, freight, repair and provisions. This was partly negated by higher revenue (surpassed our expectation by 5%), led by higher lead and silver volumes and better zinc spreads over LME.
The company’s PAT at R1,880 crore beat our R1,800-crore estimate due to higher other income and lower tax rate. Other income at R590 crore was significantly higher than our estimated R500 crore, as it included mark-to-market gain of R80-90 crore. Tax rate was also favourable at 11.2% (estimated 15.1%). Cash balance at end of FY14 at R25,500 crore was higher than our estimate of R24,500 crore.