Q1FY19 result highlights- Lower volume, higher CoP depresses profits
Key Positives: Maintained FY19E volume and CoP guidance of US$950-975/t (Q1FY19 CoP: US$1,043/t)
Key Negatives: Low zinc volume, high cost
Change in estimates: Cut FY19E EPS by 14% and FY20e by 6% to factor in lower metal prices
Valuation & view- Reiterate Underperformer with revised TP of Rs256
The LME Zinc prices have fallen sharply and is down ~20% from April 2018 to ~US$2,600/t. This was on account of uncertainty in the global demand growth amid trade war fears. According to International Lead and Zinc Study group, refined zinc consumption fell by 0.5% yoy to 5.516mt while production increased by 2.5% yoy to 5.519mt, thereby a balanced zinc market during January-May2018 (surplus of 3kt as against deficit of 158kt YoY). As the global zinc inventory remains low at ~30 days, we believe zinc prices should move up (CMP: US$2,600/t). We factor in average zinc price of US$2,750/t for the rest of FY19E and FY20E. To factor in Ytd zinc prices, we reduce our average LME zinc price to US$2,831/t (earlier US$3,200/t) in FY19E and US$2,750/t (earlier US$2,900/t) in FY20E. We value HZ’s zinc business at 5.5x FY20E EV/EBITDA (global peers trading at 4.7x CY19E EV/EBITDA) and silver at 8.5x FY20E EV/EBITDA and arrive at a fair value of Rs256 (Rs287 earlier). 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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