Hindustan Zinc's Q3FY19 results (Underperformer) - Volume & prices inflate profits

Q3FY19 result highlights- in line operating profits

• Hindustan Zinc (HZ) reported operating results in-line with IDFCe. It reported EBITDA of Rs28.4bn, up 22% qoq due to higher volumes, and higher zinc realisation supported by 3% depreciation in rupee against US$. Refined zinc CoP (ex-royalty) was down 4% qoq to US$997/t (but was down 1% qoq to Rs71,855) due to low fuel costs and higher volumes offset by higher mining development costs. Refined zinc and lead volumes were higher by 17% and 10% qoq respectively to 187kt and 54kt due to higher mined metal availability and improved ore grade (8.2% vs 7.6% qoq). Derived zinc realisations were higher by 5% qoq to ~Rs205k/t due to increase in LME prices (~2% qoq) and rupee depreciation (~3% qoq).
• Silver EBIT, at Rs5.9bn (25% of total EBIT), was up 16% qoq due to higher volume (up 11% qoq to 178t) and higher realisation (up 2% qoq).
• Other income at Rs5.5bn, was higher by 40% qoq due to mark-to-market gains resulting due to softening interest rates.
• HZ reported net cash of ~Rs125bn (Rs30/share) at Q3FY19-end, down ~46% qoq mainly due to payment of interim dividend in Nov-18.

Key Positives: Higher zinc prices and volume, higher grade of ore, lower guidance of CoP (less than US$950/t in Q4FY19, at current exchange rate).

Key Negatives: Lower Lead prices, down 8% qoq

Impact on financials: No change, introduce FY21 estimates

Valuation & view- Reiterate Underperformer with revised TP of Rs227

According to the International Lead and Zinc Study group (ILZSG), deficit in zinc market is likely to reduce to 72kt in CY19E (vs 322kt in CY18E) as supply is expected to grow by ~3% yoy against demand growth of 1.1% yoy. Global zinc inventories are at low levels. As a result, we expect LME zinc prices to hover around current levels of ~US$2,550/t before tapering off in H2CY19 onwards as deficit reduces gradually. We have factored in average zinc price of US$2,500/t for FY20E and US$2,400/t in FY21E. We value HZ’s zinc business at 5.5x FY20E EV/EBITDA (global peers trading at 5.0x CY19E EV/EBITDA) and silver at 8.5x FY20E EV/EBITDA and arrive at a TP of Rs227. We reiterate our Underperformer rating due to expectation of lower zinc prices and expensive valuations (trading at 7.4x FY20E EV/EBITDA).