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MOSL: HINDUSTAN ZINC (Neutral)- In-line-production challenges continue

(HZ IN, Mkt Cap USD12.6b, CMP INR212, TP INR225, 6% Upside, Neutral)

Expect volumes to increase but valuations pricing in benefits
** 3QFY20 results broadly reflect Hindustan Zinc’s (HZL) continuing challenges in ramping up production. While mined metal production did recover (+4% QoQ), it was on a low, seasonally weak base. Revenue/EBITDA was up 4%/8% QoQ (in-line). We expect volumes to recover in 4QFY20 as production issues recede with ramp-up from SK mines. We build in 17% QoQ improvement in EBITDA for 4QFY20 on higher volumes and lower costs. However, at 6x FY21E EV/EBITDA, this benefit is well baked in. Maintain Neutral.

In-line; challenges to production ramp-up continue
** HZL’s EBITDA was up 8% QoQ at INR22.9b (in line with est) on the back of some sequential recovery in volumes. Refined metal production rose 4% QoQ to 219kt. Revenue also increased 4% QoQ on higher zinc/silver volumes and slightly better LME prices. PBT came in at INR21b (flat QoQ). PAT, though decreased 22% QoQ to INR16.2b (5% lower than est.) as 2QFY20 had deferred tax credits of INR3.65b.

** Reported CoP increased USD29/t QoQ to USD1,077/t on incremental mining activities and higher one-time repair and maintenance costs.

Managements cuts guidance for refined metal production (again)
** Management has cut its FY20 metal production guidance from 950kt to 910kt given the production challenges. We note that this is the second straight quarter of guidance cut (2QFY20 saw metal production guidance cut from 1mt to 950kt).

** Decline in mine production (-5% YoY) for the quarter was due to lower ore grades at Kayad and Sindesar Khurd (SK) mines. Lead production dropped significantly (-24% YoY) due to problems in the cell house, which has now been resolved.

** Plan for mining expansion is in the final phase and on track to achieve capacity of 1.2mtpa mined metal production.