Hindustan Zinc's Q4FY18 results (Underperformer) - Hedging restricts profits, no final dividend
Q4FY18 result highlights- Lower CoP, higher volume boosts profits
- Hindustan Zinc (HZ) reported in-line operating results with EBITDA of Rs36.2bn, up 11.6% qoq and EBITDA/t of US$2,162, up 5.6% qoq. The results could have been better but was affected adversely by ~Rs3.35bn due to hedging zinc-lead volume at a lower than the average prices. Zinc production cost at US$925/t was lower 10% qoq due to higher production & improved grade (8.74% v/s 8.01% in Q3FY18).
- Silver EBIT, at Rs5.47bn (17% of total EBIT), was up 22% qoq due to higher volume (up 27% qoq to 167t), partially offset by 3% qoq lower realisation.
- HZ reported net cash of ~Rs204bn (Rs48/share) at FY18-end.
Key Positives: Positive commentary on zinc market; FY19 silver volume guidance of 650-700t
Key Negatives: No final dividend announced; subdued volume growth in zinc-lead in FY19E; FY19E Zinc CoP ex royalty guidance of US$950-975/t (FY18 COP: US$976/t)
Valuation & view- Reiterate Underperformer with TP of Rs287
The volatility in the zinc prices increases at higher levels despite the world zinc market continues to be in deficit in CY18E. According to International Lead and Zinc Study group, the word zinc market deficit is expected to reduce to 263kt in CY18E v/s 495kt in CY17. As a result, we expect zinc prices to remain firm in FY19E and then taper off in FY20E. We have factored in average LME zinc price of US$3,200/t (April 2018 average is ~US$3,200/t) in FY19E and US$2,900/t in FY20E.
Global zinc producers are trading at an average of 5.0x CY19E EV/EBITDA while silver companies are trading at 8.6x CY19E EV/EBITDA. We change the valuation methodology and value HZ’s zinc business at 6.0x FY20E EV/EBITDA and silver at 10.0x FY20E EV/EBITDA, a 15-20% premium to global peers and arrive at a fair value of Rs287 (Rs278 earlier). HZ is no more a dividend play now. We reduce our FY19 & FY20 DPS by Rs5 to Rs12.7 & Rs12 respectively. We believe the stock price factors in average zinc price of US$3,400/t in FY20E and as a result does not provide any upside. We reiterate Underperformer.
Hindustan Zinc is engaged in the operation of mining, smelting and refining zinc and lead as their principal products and; silver and cadnium as by products. Co.'s resources and reserves total 365.1 tonnes throughout India. Co. also implements several projects to reduce energy and water consumption through wind power farms. The zinc, lead and silver metals are sold throughout India as well as the Middle East and Asia.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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