CMP 168.40

Target Price 190.00

ISIN: INE267A01025

JULY 22nd

2014

HINDUSTAN ZINC LIMITED

Result Update (PARENT BASIS): Q1 FY15

BUYBUYBUYBUY

Index Details

Stock Data

Sector Metals (Zinc)

BSE Code 500188

Face Value 2.00

52wk. High / Low (Rs.) 184.00/94.00

Volume (2wk. Avg. Q.) 282000

Market Cap (Rs. in mn.) 711540.52

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS FY14A FY15E FY16E

Net Sales 136360.40 144542.02 152491.84

EBITDA 88609.10 93139.25 99736.51

Net Profit 69046.20 73130.64 78378.42

EPS 16.34 17.31 18.55

P/E 10.31 9.73 9.08

Shareholding Pattern (%)

1 Year Comparative Graph

HINDUSTAN ZINC LIMITED BSE SENSEX

SYNOPSIS

Hindustan Zinc Ltd (HZL) is one of the world’s

largest integrated producers of Zinc-Lead and a

leading producer of Silver globally.

Net sales of the company stood at Rs. 30071.90

million in 1st quarter of FY15 from Rs. 29841.60

million in the corresponding quarter last year.

In Q1 FY15, net profit declines to 2.58% y-o-y at

Rs.16176.70 million against Rs. 16604.50 million in

Q1 FY14.

The zinc metal cost of production before royalty

during the quarter was Rs. 60,093 ($1,005), which

is 29% higher in Rupee as against a corresponding

quarter of previous year.

For Q1 FY15, Revenues from zinc & lead segment

rose up by 5% of Rs.25861.50 million as compared

to Rs.24660.40 million for Q1 FY14.

As on June 30, 2014, the Company has cash and cash

equivalents of Rs. 262720.00 million, out of which

Rs. 221720.00 million was invested in mutual funds,

Rs. 20490.00 million in bonds and Rs. 20000.00

million were in fixed deposits with banks.

During the quarter, total mine development

increased by 15%. Rampura Agucha and Sindesar

Khurd shaft projects are progressing well.

Net Sales and PAT of the company are expected to

grow at a CAGR of 6% and 4% over 2013 to 2016E

respectively.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Hindustan Zinc Ltd 168.40 711540.52 16.34 10.31 1.90 175.00

National Aluminum Ltd 60.50 155922.90 2.49 24.30 1.24 30.00

Alicon Castalloy Ltd 177.50 1952.50 15.08 11.77 1.67 50.00

QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q1 FY15,

Hindustan Zinc Ltd. is the world’s largest integrated

producer of Zinc-Lead. It has a metal production

capacity of over 1.0 million MT per annum, has

reported its financial results for the quarter ended

30 JUNE, 2014.

The company has registered its net sales of Rs. 30071.90 million for the 1st quarter of the current year 2014-15

as against Rs. 29841.60 million in the corresponding quarter of the previous year. The Net sales increase in Q1

was driven by higher Zinc LME Price & premium and rupee depreciation, offset by lower volumes. The company

has reported an EBITDA of Rs. 20697.80 million against Rs. 21190.50 million over corresponding quarter of the

previous year, decreases due to lower production volumes and higher production cost. In Q1 FY15, net profit is at

Rs. 16176.70 million against Rs. 16604.50 million in Q1 FY14. The company has registered an EPS of Rs. 3.83 for

the June quarter as against an EPS of Rs. 3.93 in the corresponding quarter of the previous year

Break up of Expenditure:

During the quarter Total expenditure rose up by 11 per cent, mainly on account of cost of material consumed by

3% and Depreciation & Amortization Expense 10% are the main attribute for the increase of Expenditure when

compared to corresponding quarter of the previous year. Total expenditure in Q1 FY15 stood to Rs. 18570.70

million as against Rs. 16697.20 million in Q1 FY14.

Rs. in million JUNE-14 JUNE-13 % Change

Net Sales 30071.90 29841.60 0.77

PAT 16176.70 16604.50 (2.58)

EPS 3.83 3.93 (2.5)

EBITDA 20697.80 21190.50 (2.33)

Particulars Rs. Millions

Q1 FY15 Q1 FY14

Cost of Material Consumed 1498.90 1452.00

Other Expenditure 1288.00 1484.30

Power & Fuel 2276.40 2648.50

Depreciation & Amortization Expense 2022.90 1843.30

Employee Benefit Expenses 1617.40 1780.50

Consumption of Stores & Spare Parts 2962.00 3264.80

Other Mining & Manufacturing Expenses 3665.40 3779.00

Mining Royalty 1986.80 2529.70

Segment Revenue

Latest Updates

• As on June 30, 2014, the Company had cash and cash equivalents of Rs. 262720.00 million, out of which Rs.

221720.00 million was invested in mutual funds, Rs. 20490.00 million in bonds and Rs 2,0000.00 million

were in fixed deposits with banks.

• EBITDA decreased by 2.33% to Rs. 20697.80 million in Q1 FY 2015 due to lower production volumes and

higher production cost.

• Net profit decreased by 2.58% to Rs. 16176.70 million in Q1 FY 2015. The impact of lower EBITDA was partly

offset by strong other income during the quarter.

Operational Performance during the 1st Quarter of FY 2014-15.

• The zinc metal cost of production before royalty during the quarter was Rs. 60,093 ($1,005), which is 29%

higher in Rupee and 20% higher in USD term from a year ago. The lower production volumes significantly

impacted costs, accentuated by rupee depreciation, planned plant shutdowns and higher mine development.

• Mined metal production was 163,131 MT in Q1, as compared with 237,825 MT a year ago. The decrease is in-

line with its mine plan, which involves lower mined metal production on a year-on-year basis in the first half

of the year. where the company excavate more waste than ore. With higher production planned in second

half, the transition to underground mining is progressing well.

Expansion Projects

During the quarter, total mine development increased by 15%. Rampura Agucha and Sindesar Khurd shaft

projects are progressing well. India's first paste-fill plant is under commissioning at Rampura Agucha mine. Mine

design and planning for further deepening of the pit at Rampura Agucha is under progress to explore extension

of mine life.

Sales Performance in Product wise

COMPANY PROFILE

Hindustan Zinc Ltd is the one of the largest integrated producers of zinc-lead with a capacity of 1.0 million MT

per annum and a leading producer of silver. The Company is headquartered in Udaipur, Rajasthan in India and

has zinc-lead mines at Rampura Agucha, Sindesar Khurd, Rajpura Dariba, Zawar and Kayad; primary smelter

operations at Chanderiya, Dariba and Debari, all in the state of Rajasthan; and finished product facilities in the

state of Uttarakhand. Hindustan Zinc is a subsidiary of the BSE, NSE and NYSE listed Sesa Sterlite Limited, a part

of London listed FTSE 100 diversified metals and mining major, Vedanta Resources plc.

Hindustan Zinc has a world-class resource base with total reserves & resources of 348.3 million MT and average

zinc-lead reserve grade of 12.0%. The Company has a track record of consistently growing its reserves &

resource base since 2003 and currently has a mine life of over 25 years.

The Company is self-sufficient in power with an installed base of 474 MW coal-based captive power plants.

Additionally, it has green power capacity of 309 MW including 274 MW of wind power and 35 MW of waste heat

power. The company has an operating workforce of over 15,000 including contract workforce.

Business Activities

HZL core business comprises of mining and smelting of zinc and lead along with captive power generation. It

manufacturers three qualities of zinc -- special high grade zinc used in construction, infrastructure, household

appliances etc; high grade zinc and prime western zinc.

Products

Rs. (in millions) Q1 FY15 Q1 FY14 CHNG %

Zinc 20570.00 19860.00 4

Lead 4520.00 4020.00 12

Silver 3180.00 4080.00 (22)

Others 1360.00 1430.00 (5)

Total 29630.00 29390.00 1

HZL manufactures 99.99% pure lead used in lead acid battery, ceramic glazes, electrodes, etc. It manufactures

silver used in photographic material, conducter, jewellery, etc. The mineral major produces cadmium, whose

purity ranges from 99.95-99.99%. It is used in Ni-Cd batteries, stablizers, coating and alloys. HZL also

manufactures sulphuric acid used in fertilizers, dyes, textiles, sugar refining, etc.

The worlds largest integrated Zinc-Lead producer; it is and one of the lowest cost producers in the world.

Hindustan is also one of the leading Silver producers globally. It has mining, smelting and power operations in

multiple locations throughout India. The principal products are: refined Zinc metal and refined Lead metal. In

addition it recovers Silver, Cadmium and Sulphuric acid.

HZL also own 474 MW of coal based thermal captive power plants in Rajasthan to support its metallurgical

operations. It also has 123.2 MW of wind energy in Gujarat and Karnataka, which is sold to the respective State

grids. An addition of 150 MW in existing wind power capacity will increase power generation capacity to 274

MW of wind energy and 36MW from waste heat generation.

Products

India's largest and the world's second largest integrated zinc-lead producer; and also one of the lowest cost zinc-

lead producers in the world. We have mining, smelting and power operations in multiple locations throughout

India

� ZINC

• Galvanizing

• Zinc Oxide

• Die Casting

• Alloys

• Rolled Zinc

� Silver

o Silverware

o Jewellery

o Silver plating

o Photography

o Dentol alloys

� Lead

o SLI ( Starting Lighting Ignition) batteries

o Industrial batteries

� Cadmium

FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as at 31st March, 2013 -2016E FY-13A FY-14A FY-15E FY-16E

I EQUITY AND LIABILITY

A) Shareholder's Funds

a) Share Capital 8450.60 8450.60 8450.60 8450.60

b) Reserves and Surplus 314306.80 365725.50 422047.23 482822.03

Sub-Total Net worth 322757.40 374176.10 430497.83 491272.63

B) Non Current Liabilities

a) Deferred Tax Liabilities 12798.60 16581.10 20228.94 24274.73

b) Other Long term liabilities 282.30 563.70 839.91 1133.88

Sub-Total Non Current Liabilities 13080.90 17144.80 21068.86 25408.61

C) Current Liabilities

a) Short term borrowings

b) Trade payables 4034.70 5103.20 6276.94 7406.78

c) Other Current Liabilities 6532.40 10184.80 15277.20 19096.50

d) Short term Provisions 8248.70 10157.80 12189.36 14139.66

Sub-Total Current Liabilities 18815.80 25445.80 33743.50 40642.94

TOTAL EQUITY AND LIABILITIES (A + B + C) 354654.10 416766.70 485310.18 557324.18

II APPLICATION OF FUNDS

D) Non-Current Assets

Fixed Assets

i. Tangible assets 84736.90 90234.30 94746.02 98535.86

ii. Intangible assets 100.50 1238.20 1671.57 1838.73

iii. Capital Work in Progress 10818.50 15409.40 19338.80 23980.11

a) Total Fixed Assets 95655.90 106881.90 115756.38 124354.69

b) Non-current investments 27.00 28.10 29.65 30.83

c) Long Term loans and advances 18982.90 29393.60 38946.52 47904.22

d) Other non-current assets 2391.90 0.00 0.00 0.00

Sub-Total Non-Current Assets 117057.70 136303.60 154732.55 172289.74

E) Current Assets

a) Current Investment 145371.80 225035.80 277919.21 329813.72

b) Inventories 11110.90 11982.40 12869.10 13512.55

c) Trade receivables 4028.70 3995.10 4090.98 4131.89

d) Cash and Bank Balances 69421.00 30314.20 25417.60 26180.13

e) Short-terms loans & advances 3733.20 3349.30 3047.86 3078.34

f) Other current assets 3930.80 5786.30 7232.88 8317.81

Sub-Total Current Assets 237596.40 280463.10 330577.63 385034.44

TOTAL ASSETS ( D+E ) 354654.10 416766.70 485310.18 557324.18

Annual Profit & Loss Statement for the period of 2013 to 2016E

Value(Rs.in.mn) FY13A FY14A FY15E FY16E

Description 12m 12m 12m 12m

Net Sales 126998.40 136360.40 144542.02 152491.84

Other Income 20031.90 18993.90 22602.74 24863.02

Total Income 147030.30 155354.30 167144.77 177354.85

Expenditure -61914.80 -66745.20 -74005.52 -77618.34

Operating Profit 85115.50 88609.10 93139.25 99736.51

Interest -268.60 -449.40 -498.83 -548.72

Gross profit 84846.90 88159.70 92640.41 99187.79

Depreciation -6470.40 -7845.90 -8630.49 -9407.23

Exceptional Items -175.30 -616.70 0.00 0.00

Profit Before Tax 78201.20 79697.10 84009.92 89780.55

Tax -9206.40 -10650.90 -10879.29 -11402.13

Net Profit 68994.80 69046.20 73130.64 78378.42

Equity capital 8450.60 8450.60 8450.60 8450.60

Reserves 314306.80 365725.50 422047.23 482822.03

Face value 2.00 2.00 2.00 2.00

EPS 16.33 16.34 17.31 18.55

Quarterly Profit & Loss Statement for the period of 31 DEC, 2013 to 30 SEP, 2014E

Value(Rs.in.mn) 31-Dec-13 31-Mar-14 30-Jun-14 30-Sep-14E

Description 3m 3m 3m 3m

Net sales 34500.70 36426.80 30071.90 36086.28

Other income 4239.50 5886.60 7173.70 4447.69

Total Income 38740.20 42313.40 37245.60 40533.97

Expenditure -16263.20 -18874.60 -16547.80 -18548.35

Operating profit 22477.00 23438.80 20697.80 21985.63

Interest -100.00 -202.50 -76.00 -90.44

Gross profit 22377.00 23236.30 20621.80 21895.19

Depreciation -2096.80 -2041.10 -2022.90 -2053.24

Profit Before Tax 20280.20 21195.20 18598.90 19841.94

Tax -3053.00 -2383.20 -2422.20 -2480.24

Net Profit 17227.20 18812.00 16176.70 17361.70

Equity capital 8450.60 8450.60 8450.60 8450.60

Face value 2.00 2.00 2.00 2.00

EPS 4.08 4.45 3.83 4.11

Ratio Analysis

Particulars FY13A FY14A FY15E FY16E

EPS (Rs.) 16.33 16.34 17.31 18.55

EBITDA Margin (%) 67.02 64.98 64.44 65.40

PBT Margin (%) 61.58 58.45 58.12 58.88

PAT Margin (%) 54.33 50.64 50.59 51.40

P/E Ratio (x) 10.31 10.31 9.73 9.08

ROE (%) 21.38 18.45 16.99 15.95

ROCE (%) 28.38 25.78 23.64 22.22

EV/EBITDA (x) 7.54 7.69 7.37 6.87

Book Value (Rs.) 76.39 88.56 101.89 116.27

P/BV 2.20 1.90 1.65 1.45

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs. 168.40, the stock P/E ratio is at 9.73 x FY15E and 9.08 x FY16E

respectively.

� Earning per share (EPS) of the company for the earnings for FY15E and FY16E is seen at Rs.17.31 and

Rs.18.55 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 6% and 4% over 2013 to 2016E

respectively.

� On the basis of EV/EBITDA, the stock trades at 7.37 x for FY15E and 6.87 x for FY16E.

� Price to Book Value of the stock is expected to be at 1.65 x and 1.45 x respectively for FY15E and FY16E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs.190.00 for Medium to Long term

investment.

INDUSTRY OVERVIEW

Zinc

The global zinc industry is dominated by the structural issue of mine supply falling short of future demand. zinc

prices are poised to move higher on the back of imminent mine closures and steady demand growth.

The Indian zinc demand witnessed strong growth in 2013 mainly on account of demand from galvanised sheet

sector. This momentum is expected to continue as new zinc applications and investment in infrastructure

projects are expected to drive domestic demand. The demand for zinc in the near-term is expected to increase by

0.7 million MT per year due to increase in Chinese demand and recovery and normalisation of the rest of the

world economy. The combination of steady demand growth and reducing supply due to mine closures will create

an environment conducive for a sharp increase in zinc prices in the foreseeable future.

Global zinc demand grew at ~4% in 2013 to 13.3 million MT from 12.8 million MT the previous year. Zinc metal

supply fell short of demand by 2%, even as global production recovered from the sharp decline witnessed in

2012.on the other hand, surplus mine supply resulted in lower zinc price. Zinc price declined by 2% in 2013

though it outperformed all other base metals due to relatively stronger demand-supply fundamentals. The

current scenario is majorly a result of lower Chinese smelter production on account of weak margins, leading to

surplus in global mined metal market. Currently, zinc mine supply along with existing inventories is sufficient to

satisfy demand from smelters and is expected to remain so till 2016.

The surplus is forecast to gradually shrink and turn to deficit with closure of some high profile mines in the

coming 3-4 years.

Strong long term outlook for developing countries

The Century mine in Australia with a capacity of 500,000 MT per annum will close in 2015. In 2016, the 160,000

MT per annum capacity Skorpion operation in namibia and in 2017 the 70,000 MT per annum capacity

pomorzarny mine in poland are expected to close down along with closure in some smaller operations. This

together with attrition at operating mines will eliminate 1.8 million MT per annumof global mine capacity by

2018 and 2.2 million MT per annum capacityby 2019.

Global zinc demand is forecasted to grow at 5-6% in 2014. China will continue to remain the dominant driving

force as galvanised sheet usage in cars and construction activity is expected to grow. The gradual recovery in

global economic activity is looking sustainable. eurozone crisis is showing signs of improvement as demand is

picking up just when there are concerns about physical scarcity of metal in the coming years.

Lead

Refined lead market will move to deficit in near-to mid term due to tougher environmental regulation, tight

primary supply and robust demand growth.

India is the second most important growth prospect in the Asian region with demand growth estimated around

7%. Much of the growth in Indian lead demand is likely to come from the industrial battery sector, supported by

India's growing telecoms industry, ongoing infrastructure development and expanding solar power market.

Lead metal market (including secondary production) was in surplus in 2013 driven by higher chinese production

and reached 11.2 million mt, compared to the demand of11.1 million Mt.

It was a tough year as demand growth was below expectation and the industry was confronted with numerous

challenges including:

• Smelter shutdowns in China due to tougher environmental regulations

• Struggling automobile industry

• Emergence of alternative battery technologies

Similar to zinc, lead mine supply will also be impacted by mine closures and will be insufficient to meet demand

from primary smelters. Consequently, production cutbacks from primary smelters are expected in the near-to-

mid term. The market is anticipated to shift into deficit in 2014 as demand growth is expected to remain robust

while lead production will be hampered by weak mine supply and stringent environmental regulations.

Consequently, lead prices are expected to gradually increase.

Global lead demand is expected to witness a robust growth of 4-5%.

Developing economies will continue to be the main drivers, with growth forecast at 6-7% p.a., compared with flat

demand from mature economies. China will continue to drive demand at a healthy ~7% growth.

Silver

The industrial demand for silver is expected to increase alongside a growing global economy.

Global silver mine production witnessed an estimated growth of 3.5% in 2013, while overall demand was flat at

33,950 Mt. Silver price in 2013 saw lower price levels through most part of the year mainly due to reluctant

investors in the precious metals market. Improved sentiment of uS economy was the main reason for low bullion

prices. Moreover, global fabrication demand increased to 28,300 MT, a 4% growth from last year due to

industrial fabrication, silverware, coins and jewellery

Indian silver demand witnessed an outstanding growth to reach 6,250 MT – driven by 4% growth in industrial

fabrication demand and 20% growth in jewellery segment. Additionally, investment demand in the country was

also high due to lower prices.

Going forward, the momentum in domestic demand is expected to continue driven by prospective growth in

industrial segments and low prices attracting more investors.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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