RESULTS REVIEW 3QFY17 13 FEB 2017

Hindustan Zinc
SELL
INDUSTRY METALS Strong tailwinds
CMP (as on 10 Feb 2017) Rs 314
Hindustan Zinc (HZ) reported a beat (revenues + Highlights of the quarter
Target Price Rs 254 8.2%, EBITDA +3.2% vs estimates), driven by higher
The SK mine is being expanded from 3.0 to 4.5 mTPA
Nifty 8,794 volumes (refined Zn +5.5% vs estimates, 3.4% YoY, ore production, and beneficiation plant to 5 mTPA.
Sensex 28,334 41.6% QoQ), somewhat offset by higher costs. Cost Zawar will be upgraded to 4 mTPA following the receipt
KEY STOCK DATA of production of zinc (zn) was higher by ~US$50 QoQ of environmental clearance. These, along with the
(US$861/t, 8.3% YoY) due to a one-time charge in the ongoing expansion of Rampura Augcha will set HZ on
Bloomberg HZ IN
ore-to-waste ratio norm over life of mine and track for 1.2 mTPA of mined metal production in FY19.
No. of Shares (mn) 4,225 additional excavation in Rampura Agucha O/C. HZ also commenced work on its fumer plant in the
MCap (Rs bn) / ($ mn) 1,325 /19,831 Mined metal volumes (595 kT in 9MFY17) are in line Chanderiya smelter, to convert Jarosite (hazardous
6m avg traded value (Rs mn) 581 with the communicated mine plan, with 2H likely to waste) into slag for the cement and construction
see ~70% of FY17 volumes. industries. This is likely to be completed by March-18
STOCK PERFORMANCE (%)
52 Week high / low Rs 333 / 135
Zn pricing has seen a sharp run (?)up, given the
Near-term outlook: Q4 is estimated to be very strong
3M 6M 12M given Zn/Pb pricing and strong volume trajectory. We
deficit situation and absence of mine restarts,
expect margins to strengthen, given a reduction in Zinc
Absolute (%) 21.5 42.6 121.7 despite high pricing. While HZ continues to deliver, CoP (one-time charge in 3QFY17), better volumes and
Relative (%) 18.6 40.6 102.5 we believe that the valuations are now expensive, realisations during the quarter. We have revised our Zn
SHAREHOLDING PATTERN (%)
given that global peers trade at 4-6x EV/EBITDA and pricing assumptions upwards by 12.5/4.2% to
9-10 P/E. Downgrade to SELL, given a recent sharp US$2,475/2,500/t due to stronger prices. FY17/18
Promoters 64.92
run up in the stock price. Our TP of Rs 254 assumes EBITDA estimates stand revised upwards by 12.3/4.4%
FIs & Local MFs 3.25 6.0x FY19 EV/EBITDA. respectively.
FIIs 0.00
Public & Others 31.83 Financial Summary
Source : BSE (Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Net Sales 49,799 34,306 45.2 35,257 41.2 1,38,535 1,75,028 1,87,953 2,13,831
Ankur Kulshrestha, CFA
EBITDA 27,834 14,783 88.3 20,767 34.0 66,406 98,969 1,06,506 1,20,144
ankur.kulshrestha@hdfcsec.com PAT 23,199 18,114 28.1 19,019 22.0 81,666 85,484 95,115 1,11,098
+91-22-6171-7346 Diluted EPS (Rs) 5.49 4.29 28.1 4.50 22.0 19.3 20.2 22.5 26.3
P/E (x) 16.2 15.5 13.9 11.9
Sarfaraz Singh EV / EBITDA (x) 15.0 10.8 9.4 7.6
sarfaraz.singh@hdfcsec.com RoE (%) 20.2 21.0 20.0 20.1
+91-22-6171-7331 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Strong volumes (mined metal Quarterly Financials Snapshot

up 43.8% QoQ) and better (Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
pricing (56.1.% YoY, 11.7% Income from operations 49,799 34,306 45.2 35,257 41.2
QoQ) helped HZ clock an Cost of materials consumed 0 6 128
EBITDA margin of 55.9% Stores and spares 3,246 2,714 2,827
Repairs to Plant and machinery 2,726 0 2,732
Power & fuel 3,767 3,356 1,222
Royalty 7,166 3,632 4,429
Other M&M expenses 2,559 4,240 2,098
Other expenses 913 5,575 2,464
Total expenses 21,965 19,523 14,491
EBITDA 27,834 14,783 88.3 20,767 34.0
Depreciation 4,589 1,716 4,317
Other income 5,882 5,547 6.0 7,702 (23.6)
Interest expense 451 51 712
PBT 28,676 18,563 54.5 23,440 22.3
Tax 5,477 449 4,421
APAT 23,199 18,114 28.1 19,019 22.0
E/o (post tax) 0 0 0
RPAT 23,199 18,114 19,019
Source: Company, HDFC sec Inst Research

Operational Data
Operational data (kT) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Mined metal 276 228 21.1 192 43.8
Refined Zinc (Total) 211 204 3.4 149 41.6
Refined Lead (Total) 36 35 2.9 32 12.5
Refined Silver (Total, tonnes) 117 115 1.7 108 8.3

Pricing (LME) (US$/t)

Zn 2,518 1,613 56.1 2,255 11.7
Pb 2,150 1,681 27.9 1,873 14.8
Silver 17 15 16.2 20 (12.2)

Zinc Cost of production (US$/t) 861 795 8.3 809 6.4

Source: Company, HDFC sec Inst Research

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Valuation Matrix
EBITDA margin
MCap EV TP EV/EBITDA (x) P/E (x)
Company Rating (%)
(US$ mn) (US$ mn) (Rs)
FY18E FY19E FY18E FY19E FY18E FY19E
Hindustan Zinc 19,492 15,790 SELL 254 9.4 7.6 13.9 11.9 56.7 56.2
Teck Resources 13,521 19,432 NR NM 5.7 5.7 9.7 9.7 42.3 43.5
Korea Zinc 6,861 5,089 NR NM 5.3 4.8 11.1 9.6 16.5 16.3
Nyrstar NV 676 1,416 NR NM 3.2 3.8 6.3 8.6 10.7 9.9
Source: Company, HDFC sec Inst Research; Bloomberg
Note: Prices as of October 20, 2016 close. NR Not rated NM Not meaningful
US$-INR: 68.0

Key Assumptions
2015 2016 2017E 2018E 2019E
Volumes
Zinc (kT) 734 759 732 771 867
Lead (kT) 135 152 159 186 210
Silver (T) 368 459 551 572 572
LME-Assumptions (US$/ton)
Zinc 2,178 1,829 2,475 2,500 2,600
Lead 2,024 1,768 1,900 2,200 2,200
Silver ((US$/oz)) 18.2 15.2 19.0 20.0 20.0
Rs/US$ rate 61.1 65.5 68.0 68.0 68.0
Source: Company, HDFC sec Inst Research

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Zn & Lead Pricing Total Zn & Lead Volumes

Zinc LME pricing (US$/T) Lead LME pricing (US$/T) Refined Zinc Refined Lead

2,500
kt
250

36

40
35
2,300

30

30
25

31
200

36
35

30
31
32
31
27

38
2,100

31
31
31
150

25
1,900

217

211
206
196
196

196
100

187
182

182

181
174
171
163
161

154

150
150
141
1,700

102
50

1,500 -

1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17

1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Silver LBMA Pricing & Volumes EBITDA Margins (%)

Refined saleable silver, total (T) - RHS
EBITDA margin (%)
Silver LBMA (US$/oz) - LHS
65.0
35.0 140
30.0 120 60.0

25.0 100 55.0

20.0 80 50.0
15.0 60
45.0
10.0 40
5.0 20 40.0

- - 35.0

1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Income Statement Balance Sheet

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net sales 145,111 138,535 175,028 187,953 213,831 SOURCES OF FUNDS
Growth % 8.2 (4.5) 26.3 7.4 13.8 Share Capital 8,451 8,451 8,451 8,451 8,451
Material and Mining Expenses 59,854 62,616 66,087 70,794 82,202 Reserves 425,080 365,401 430,308 502,528 586,883
Employee Expenses 8,689 7,862 8,255 8,668 9,101 Total Shareholders Funds 433,531 373,852 438,759 510,979 595,334
SG&A Expenses 3,192 3,302 3,349 3,731 4,330 Total Debt 0 0 0 0 0
Other operating expenses 1,955 2,079 2,183 2,292 2,407 Deferred Taxes 25,186 25,713 25,713 25,713 25,713
Operating profits 71,421 62,677 95,154 102,468 115,791 Long term Provisions & Others 1,321 1,118 1,118 1,118 1,118
Operating Profit Margin (%) 49.2 45.2 54.4 54.5 54.2 TOTAL SOURCES OF FUNDS 460,038 400,683 465,590 537,810 622,165
Other operating income 2,772 3,729 3,815 4,039 4,353 APPLICATION OF FUNDS
EBITDA 74,193 66,406 98,969 106,506 120,144 Net Block 94,462 99,413 117,609 114,950 112,569
EBITDA % 51.1 47.9 56.5 56.7 56.2 CWIP 23,340 26,814 20,614 24,214 27,814
EBITDA Growth % 6.6 (10.5) 49.0 7.6 12.8 LT Loans and Advances 40,080 55,317 55,317 55,317 55,317
Depreciation 6,442 7,126 11,804 12,659 12,381 Total Non-current Assets 157,882 181,545 193,541 194,482 195,700
EBIT 67,751 59,280 87,165 93,848 107,762 Inventories 12,118 10,582 13,230 14,202 16,140
Other Income (including EO Debtors 6,588 2,441 2,940 3,156 3,587
28,183 26,993 22,600 28,264 34,841
items) Other Current Assets 5,481 5,520 5,520 5,520 5,520
Interest 235 169 169 169 169 Cash & Equivalents 307,851 352,351 282,076 352,886 435,090
PBT 95,699 86,104 109,595 121,943 142,434 Total Current Assets 332,038 370,894 303,765 375,764 460,336
Tax 13,921 4,438 24,111 26,827 31,335 Creditors 6,308 7,788 9,800 10,520 11,955
RPAT 81,778 81,666 85,484 95,115 111,098 Other Current Liabilities &
23,574 143,968 21,902 21,902 21,902
APAT 81,778 81,666 85,484 95,115 111,098 Provns
APAT Growth (%) 18.4 (0.1) 4.7 11.3 16.8 Total Current Liabilities 29,882 151,756 31,701 32,422 33,857
Adjusted EPS (Rs.) 19.4 19.3 20.2 22.5 26.3 Net Current Assets 302,156 219,138 272,063 343,342 426,479
EPS Growth (%) 18.4 (0.1) 4.7 11.3 16.8 TOTAL APPLICATION OF FUNDS 460,038 400,683 465,590 537,810 622,165
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Cash Flow Key Ratios

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 95,699 86,104 109,595 121,943 142,434 PROFITABILITY (%)
Non-operating & EO items (19,634) (27,596) (22,600) (28,264) (34,841) EBITDA Margin 51.1 47.9 56.5 56.7 56.2
Interest expenses 235 169 169 169 169 APAT Margin 56.4 58.9 48.8 50.6 52.0
Depreciation 6,442 7,126 11,804 12,659 12,381 RoE 20.2 20.2 21.0 20.0 20.1
Working Capital Change (4,923) 15,572 (1,135) (468) (933) Core RoCE 69.0 112.8 96.6 60.7 70.1
Tax paid (19,846) (18,543) (24,111) (26,827) (31,335) RoCE 20.3 20.3 21.1 20.1 20.1
OPERATING CASH FLOW ( a ) 57,973 62,833 73,724 79,211 87,876 EFFICIENCY
Capex (16,555) (15,228) (23,800) (13,600) (13,600) Tax Rate (%) 14.5 5.2 22.0 22.0 22.0
Free cash flow (FCF) 41,418 47,605 49,924 65,611 74,276 Asset Turnover (x) 0.9 0.7 0.9 0.9 1.0
Investments 28 0 0 0 0 Inventory (days) 30 27 27 27 27
Non-operating Income 28,211 27,295 22,600 28,264 34,841 Debtors (days) 16 6 6 6 6
INVESTING CASH FLOW ( b ) 11,684 12,067 (1,200) 14,664 21,241 Payables (days) 16 20 20 20 20
Debt Issuance/(Repaid) 0 0 0 0 0 Cash Conversion Cycle (days) 31 13 13 13 13
Interest expenses (235) (169) (169) (169) (169) Debt/EBITDA (x) - - - - -
FCFE 11,919 12,236 (1,031) 14,834 21,410 Net D/E - - - - -
Share Capital Issuance 0 0 0 0 0 Interest Coverage - - - - -
Dividend (18,785) (32,000) (142,629) (22,896) (26,743) PER SHARE DATA
FINANCING CASH FLOW ( c ) (19,020) (32,169) (142,799) (23,065) (26,912) EPS (Rs/sh) 19.4 19.3 20.2 22.5 26.3
NET CASH FLOW (a+b+c) 50,637 42,731 (70,275) 70,810 82,204 CEPS (Rs/sh) 20.9 21.0 23.0 25.5 29.2
EO Items/Others 1,864 1,770 DPS (Rs/sh) 4.4 27.8 4.0 4.5 5.3
Closing Cash & Equivalents 307,851 352,351 282,076 352,886 435,090 BV (Rs/sh) 102.6 88.5 103.8 120.9 140.9
Source: Company, HDFC sec Inst Research VALUATION
P/E 16.1 16.1 15.4 13.8 11.8
P/BV 3.0 3.5 3.0 2.6 2.2
EV/EBITDA 14.1 14.9 10.7 9.3 7.5
OCF/EV (%) 5.7% 6.5% 7.1% 8.2% 10.0%
FCF/EV (%) 4.1% 4.9% 4.8% 6.8% 8.4%
FCFE/Market Cap (%) 4.0% 4.5% 3.7% 6.1% 7.3%
Dividend Yield (%) 1.4 8.9 1.3 1.4 1.7
Source: Company, HDFC sec Inst Research

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Hindustan Zinc TP Date CMP Reco Target
350 31-Mar-16 175 BUY 171
300 8-Apr-16 160 BUY 171
22-Apr-16 172 NEU 171
250
21-Jul-16 194 NEU 180
200 21-Oct-16 250 NEU 230
150 13-Feb-17 314 SELL 254

100
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Aug-16
Apr-16

Jan-17
Feb-16

Jul-16

Sep-16

Feb-17
Nov-16
Jun-16
May-16

Dec-16
Mar-16

Oct-16
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 HINDUSTAN ZINC: RESULTS REVIEW 3QFY17

Disclosure:
We, Ankur Kulshrestha, PGDBM, & Sarfaraz Singh, PGDM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately
reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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