Hindustan Zinc's Q3FY20 results (Neutral) - Volume to boost earnings in FY21 but factored in

Q3FY20 result highlights- in line operating profits

• HZ reported EBITDA of Rs22.9bn, up 8.1% qoq due to higher zinc and silver volumes. Mined metal production at 235,000t, was up 7% qoq. However, due to timing mismatch, integrated metal production stood at 219,000t, up 4% qoq. Refined Zinc production increased by 7% qoq to 178,000t while lead production declined by 7% qoq to 41,000t due to temporary issue at Dariba lead smelter.
• Zinc realisations (derived) were flat qoq to US$2,583/t whereas sales volumes were up 2.4% qoq to 172,000t. Though lead realisations were higher by 0.3% to US$2,179/t, volumes were lower by 4% qoq to 42,000t. Despite lower power and fuel costs, refined zinc CoP ex-royalty was up 3% qoq to US$1,077/t (up 4% in INR). This was due to higher mine development expenses and one-time repair and maintenance costs.
• Silver EBIT, at Rs6.13bn (~23% of total EBIT), was driven by 13.6% qoq higher silver volumes (153,000t) and 5% qoq higher prices (Rs45,098/t).
• HZ reported net cash of ~Rs195bn (Rs46/sh) at Q3FY20-end, down ~1% qoq.

Key Positives: Higher mined metal volumes, silver volumes

Key Negatives: Higher CoP

Impact on financials: Cut FY20E EBITDA by 7% to factor in lower volumes and prices

Valuation & view- Maintain Neutral with TP of Rs212

We expect HZ to achieve 17% yoy growth in EBITDA in FY21E on the back of 21%/6% volume growth in zinc/lead volumes as we expect expansion projects to complete in Q4FY20 end. However, slower ramp-up of production in mines and overall lower grades in FY20 has led us to lower zinc and lead volumes by 2.4% and 5.7% to 0.72mt and 0.197mt respectively. We expect zinc prices to hover around current levels and hence, reduce zinc price assumption by US$100/t to US$2,450/t in FY20e, however, maintain price assumption of US$2,400/t in FY21e. We value HZ’s zinc business at 5.5x FY21E EV/EBITDA and silver at 8.5x FY21E EV/EBITDA and arrive at a target price of Rs212/sh. We continue to expect a dividend of Rs13/sh in FY20E (div yield of ~6%). We maintain Neutral on the stock, however, divestment of GoI's stake in HZ pose a upside risk to our target price.