MOSL: HINDUSTAN ZINC (Neutral)-In-line-announces huge dividend; capacity expansion on track

Hindustan Zinc: In-line; announces huge dividend; capacity expansion on track

(HZ IN, Mkt Cap USD16.3b, CMP INR282, TP INR285, 1% Upside, Neutral)

• EBITDA was down 14% QoQ to INR23.3b (in-line) in 2QFY19, led by an 18% decline in zinc LME and lower zinc volumes, partially offset by 5% depreciation in the INR and higher byproduct revenue. Tax rate was lower by ~600bp QoQ to 20.2%. PAT declined at a slower rate of 5% QoQ to INR18.1b.
• HZL announced a huge dividend of INR20/share (INR101b cash flow), supported by INR230b cash surpluses on balance sheet and strong FCF.
• Mine production increased 10% QoQ, but refined metal production declined 1% QoQ due to lower availability of concentrate in early part of the quarter.
• Sales of (1) zinc declined 6% QoQ to 160kt (20kt MIC inventory pile-up), (2) lead increased 17% QoQ to 49kt and (3) silver increased 14% QoQ to 161t.
• Cost of production (CoP) remains high. It increased by 4% QoQ in INR terms and declined 1% in USD terms to USD1,034/t (excluding royalties). CoP is likely to decline in 2H on account of operating leverage and the start of vertical shafts. Mine production is expected to be 17% higher in 2H v/s 1H.
• Capex guidance has increased by ~10% to USD400-450m for FY19. Most projects (vertical shafts at RA+SKM, mills at SKM+Zawar and fumers) – which should increase capacity to 1.2mtpa – are likely to be completed in FY19, and thus, we expect mine production of 1.1mt in FY20.