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Hindustan Zinc Rating | Reduce — weak showing in Q4 was on expected lines

Axis Capital

Q4FY19 Ebitda at Rs 27.9 bn was down 23% y-o-y for Hindustan Zinc (in line with consensus/our estimates) on (i) 13% decrease in LME Zinc price y-o-y (USD adjusted) and (ii) 15% decline in Zinc volumes. The decline was partly offset by high Silver volumes from Sindesar Khurd mines. Company reiterated meeting 1.2-mnt production capacity through FY20 with production guidance of 1 mnt.

Zinc price outlook

Zinc prices have moved up ~15% from Q4 lows on supply disruptions due to cyclone in Australia and delay in ramp-up of new capacities. However, we remain negative on Zinc prices in light of (i) sizeable capacity additions and (ii) subdued global growth. Even though China increased investment in infrastructure and announced stimulus to promote consumption, we do not see much upside in Zinc consumption. We have Reduce rating on the Hindustan Zinc stock.

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Other highlights

Valuation: We cut our FY20/21 EPS estimate to Rs 22/24 (vs. Rs 23/26 earlier) to factor in reduction in volumes estimate by 12/4% to 0.96/1.1 mnt. We increase our EV/Ebitda multiple by a notch to 6x FY21e as visibility improved on stabilisation of new capacity for the company. Our revised target price stands at Rs 285 (vs. Rs 278 earlier), which implies 5% upside.

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Volumes: Mined metal production fell 4/1% y-o-y to 245/936 kt during the quarter/year mainly due to transition to underground mining at Rampura Agucha mines and technical bottlenecks, partly offset by ramp-up in production at other mines. Production run-rate exited at 1 mnt, as underground mine production has ramped up and the shift from open cast to underground mining is complete. Share of Lead increased 380 bps y-o-y to 23% of total metal due to ramp-up of SK mines and retrofit of pyro smelter at Chanderiya mine. This resulted in 6% y-o-y increase in Lead production vs. 15% decline in Zinc production. Higher Lead led to record increase in Silver production at 191 tons (13% up y-o-y).