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Hindustan Zinc's Q4FY19 results (Underperformer) - Lower volume offsets higher realisation

Q4FY19 result highlights- in line operating profits

• Hindustan Zinc (HZ) reported operating results in-line with IDFCe. It reported EBITDA of Rs27.9bn, down 1.7% qoq despite higher realisations and lower costs which was more than offset by lower volumes. Refined Zinc and Lead volumes were lower by 5.3% qoq to 177kt and 3.7% qoq to 52kt respectively. Benefit of higher LME zinc prices (up 3% qoq) were offset by rupee appreciation against USD (2% qoq). As a result, derived zinc realisations were higher by 1.5% qoq to Rs208k/t. Refined Zinc CoP ex-royalty was down 3% qoq to Rs69,545/t (US$987/t) due to lower coal and fuel costs.
• Silver EBIT, at Rs6.4bn (28.5% of total EBIT), was up 8.7% qoq due to higher volume (up 12% qoq to 199t) partially offset by lower realisation (down 1.6% qoq).
• HZ reported net cash of ~Rs170bn (Rs40/share) at Q4FY19-end, up ~35% qoq.

Key Positives: Higher zinc realisation, higher silver volumes

Key Negatives: Lower zinc volumes, lower than expected volume guidance in FY20E, FY20 CoP guidance of ~US$1,000/t (US$987 in Q4) despite higher volumes

Impact on financials: Cut EBITDA by 4.1% in FY20E and 6.6% in FY21E to factor in lower volumes which offset increased LME zinc price assumption. Increased FY20 avg price by US$100/t to US$2,600/t to factor in higher prices in April’19.

Valuation & view- Reiterate Underperformer with revised TP of Rs212

Lower zinc inventories in LME have fared well for zinc prices in CY19 so far. The International Lead and Zinc Study group (ILZSG) has forecast deficit in zinc market to reduce to 72kt in CY19E (vs 384kt in CY18) as supply is expected to grow by ~3% yoy against demand growth of 1.1% yoy. We expect zinc supply to improve from 2HFY20E onwards. As a result, we expect LME zinc prices to taper from current levels of US$2,800/t and average US$2,500/t during Q2-Q4FY20. With cut in earnings due to lower volume and increased dividend pay-out (FY20 DPS of Rs14.7 v/s Rs9.2 earlier), we reduce our target price to Rs212 (earlier Rs227). We value HZ’s zinc business at 5.5x FY20E EV/EBITDA (global peers trading at 5.2x CY19E EV/EBITDA) and silver at 8.5x FY20E EV/EBITDA. We reiterate our Underperformer rating due to expectation of lower zinc prices and expensive valuations (trading at 8.3x FY20E EV/EBITDA).