171 Percent Growth In Sales
Hindustan Zinc Ltd. reported an outstanding growth in net sales at Rs.2,480.00 Crore in Q3FY07 when compared to Rs.914.00 crore achieved during the corresponding quarter last year, growing by 171.3 percent. The Company posted marginal growth of 1.6 percent from Rs.2,441.00 crore reported in Q2FY07. Zinc prices were firm during the quarter. Average price was $ 4180 per tonne, 150 percent more than that of last year period. Production of zinc increased by more than 33 percent to around 92,000 tonnes compared to Q3FY06. Lead output increased by more than 100 percent YOY to 13,700 tonnes.

Slight Improvement in Expenses
Total expenses were at Rs.573.00 crore in Q3FY07, while the total expenses as a proportion of net sales was 23.1 percent in Q3FY07 and 24 percent in Q2FY07.

PBDIT Increases By 260 Percent
Profit before depreciation, interest & tax (PBDIT) posted an impressive growth of 267 percent to Rs.1,982.00 crore when compared to Rs.540.00 crore reported in Q3FY06. Quarter on Quarter PBDIT growth was at 4.2 percent from Rs.1,902.00 crore registered in Q2FY07. PBDIT as a proportion of net sales was 79.9 percent in Q3FY07 when compared to 59.1 percent during the corresponding quarter last year and 77.9 percent during the previous quarter.

305 Percent Jump In PAT
PAT posted an impressive growth of 305.8 percent to Rs.1,335.00 crore when compared to Rs.329.00 crore reported in Q3FY06. Quarter on Quarter PAT growth was at 2.9 percent from Rs.1298 crore registered in Q2FY07. PAT as a proportion of net sales was 53.8 percent in Q3FY07 when compared to 36 percent during the corresponding quarter last year and 53.2 percent during the previous quarter. EPS during the quarter amounted to Rs 31.60 compared to Rs 30.72 in Q2FY07 and Rs 7.79 in Q3FY06.

Outlook & Valuation
Expansion
The 170,000 tonnes zinc smelter project at Chanderia and Agucha mine project are advancing on expected lines and are projected to be completed on time by first quarter of 2008.

De-bottlenecking Project
In order to improve the efficiency, Hindustan Zinc is spending Rs 777 crore towards a de-bottlenecking project at Debari and Chanderia smelters that involves increasing the zinc capacity by 88,000 MT and having balancing equipments at mines. The effort will be through by first quarter of 2008. The project is expected to be financed by its internal accruals.

Captive Power Plant
Hindustan Zinc is constructing a captive power plant to cater to the demands of its unit at Jawar Mines in Udaipur of Rajasthan. The project will cost about Rs 129 crore. The power plant will have a capacity of 80 mw.

Wind Power
Looks like Hindustan Zinc hopes to be powered by wind. In an effort to cash in on the wind power potential, the company is pumping in Rs 400 crore for establishing 75 mw wind power plant - to be set up either in Gujarat or Karnataka.

 

Overseas Foray
Hindustan Zinc is in the process of purchasing copper mine in Congo whose potential is estimated to be around a billion tonne. This is the first time the company is venturing outside India in search of business opportunities. Due to this initiative, the company will be setting its foot in the copper business. Total exposure for the project is estimated to be $2 billion which will be met mostly through internal accruals and to a certain extent by follow-on offering.

Import Duty Cut
Ever since inflation started to rise, the government has been having sleepless nights and trying to moderate its impact. As part of the measure to contain inflation, the government has reduced import duty on non-ferrous metals from 7.5 percent to 5 percent. With this measure, the government hopes to bring inflation within manageable limits.

Budget Bang
The budget for 2007 has got agriculture as the focus area. Not much concentration has been put on the industry front since the government feels that industrial economy has grown to a level wherein it is self sustainable.

No steps have been taken which affect the non-ferrous sector in general and the company in particular. But there are certain measures taken in the budget which have a negative impact. The proposal to increase dividend distribution tax to 15 percent from 12.5 percent puts more load on the company as it amounts to higher tax on the dividend declared. The budget has also levied education cess of 1 percent to increase funding of education which again swells the tax pocket and affects the bottomline of the company.

Outlook
Demand for zinc is expected to grow in the region of 8-10 percent in the medium term. Zinc consumption is envisioned to grow to 460,000 tonnes in 2006-07 from 420,000 tonnes in 2005-06. 2007-08 demand is expected to be more than 490,000 tonnes. International demand for the metal is envisaged to grow at 5 percent and supply growth pegged at only 1.5 percent for the next 10 years. Hence the prices would continue to witness an upward bias. Zinc prices have advanced by more than 115 percent in the last one year.

About 2/3rd of zinc production is accounted for by galvanized steel industry. With infrastructure and construction sectors, user industries of galvanized steel, growing at a fiery pace, the demand for galvanized steel has proportionately gone up. Zinc imports, on the other hand, are projected to come down in 2-3 years. China, with its scorching pace of growth, is likely to consume around 1/3rd of the world production of the metal.

The company is well placed to capitalize on the increased demand for zinc. With the projected shortfall of zinc in the medium term, the prices will show an upward momentum. Company’s expansion plans at Chanderia and Agucha mines, de-bottlenecking project at Chanderia and Debari smelters, construction of Jawar captive power plant to take care of its power requirements and wind energy initiatives put the company in good position. These efforts place the company in bullish mode.

The stock is currently trading at an EV/ EBIDTA of 13.26x FY07E earnings and 15.85x FY08E earnings. The stock has been historically trading at a P/E of 4.54x its one-year forward earnings. The company has also been paying dividend, with a yield of 0.89%. We rate the stock to BUY considering the significant correction in its stock price and have a FY08E price target of Rs.1,077 at a P/E of 6.75x FY08E earnings. In terms of P/E, the stock is currently trading at 4.89x the FY07E EPS of Rs.115.12 and 3.53x its FY08E EPS of Rs.159.55.

 

During the last one year, Hindustan Zinc price has gone up by 7 percent as compared to 16 percent growth of the Sensex. However YoY numbers do not communicate the 225 percent fluctuation in the stock price of Hindustan Zinc Ltd.