Q2FY20 result highlights- in line operating profits
Key Positives: Lower CoP
Key Negatives: Lower silver volumes and zinc prices, No interim dividend announced, FY20 production guidance cut
Impact on financials: Cut FY20E/FY21E EBITDA by 6%/2% to factor in lower zinc and silver volumes.
Valuation & view- Maintain Neutral with revised TP of Rs212
Zinc prices have rebounded by 10% in last one month to US$2,590/t on lower mine production across globe and lower inventories at global warehouses. With Glencore cutting output by 85,000t in CY19e and HZ lowering production guidance in FY20, we expect zinc market to remain tight in FY20 and as a result, expect prices to remain high (CMP- US$2,590/t) in H2FY20 before tapering off to 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 revised target price of Rs212/sh (earlier Rs216/sh). We continue to expect a dividend of Rs14/sh in FY20E. We maintain Neutral on the stock, however, special dividend declaration and divestment of GoI's stake in HZ pose a upside risk to our target price.
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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