Hindustan Zinc's Q1FY19 results (Underperformer) - A weak quarter

Q1FY19 result highlights- Lower volume, higher CoP depresses profits

• Hindustan Zinc (HZ) reported lower-than-expected operating results with reported EBITDA of Rs27.1bn, down 25% qoq and blended EBITDA/t of US$1,910, down 12% qoq. However, the above EBITDA included ~Rs1.25bn wage arrears related to long term wage settlement. Adjusting for the same, EBITDA stood at Rs28.4bn, down 22% qoq, still lower by ~4% from IDFCe. The closure of open cast mines and maintenance shutdown of smelters led refined zinc volume to fall by 17% qoq to 172kt. This along with higher coal cost (up 5% qoq) and lower zinc-lead grade (7.64% v/s 8.74% in Q4FY18) led zinc production cost ex-royalty to rise by 17% qoq to US$1,043/t.
• Silver EBIT, at Rs4.7bn (20% of total EBIT), was down 14% qoq due to lower volume (down 16% qoq to 141t), partially offset by 2% qoq higher realisation.
• HZ reported net cash of ~Rs213bn (Rs50/share) at Q1FY19-end, up ~4% qoq.

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.