For 2QFY2016, Hindustan Zinc (HZL) reported a 4% increase in revenue at
Rs3,908cr (~6% ahead of our estimate of Rs3,693cr). The outperformance was led
by better than expected volumes with refined zinc production at 211,000MT,
increasing 17% yoy. The EBITDA came in at Rs2,164cr, 16% ahead of our estimate
of Rs1,874cr, led by better than expected revenue growth. The EBITDA increased
8% yoy and was up 30% sequentially. The EBITDA margin improved 212bp yoy at
55.4% and was 463bp higher than our expectation. Depreciation and finance
expenses were in line with our expectations. The Net profit increased 5% yoy to
Rs2,285cr and was 15% ahead of our expectation.
HZL’s Management has guided at a ~16% increase in refined metal production
volumes in FY2016, led by the strong performance of 2QFY2016. The
Management also indicated that the expansion projects remain on track, which
should help the company drive volumes.
Outlook and valuation: We expect zinc prices to continue its decline going
forward led by global headwinds. We however have increased our volume
estimates led by the strong outperformance in 2QFY2016. We raise our FY2016
and FY2017 estimates in view of the better than expected volumes and operating
leverage potential. The stock is currently trading at 4x FY2017E EV/EBITDA. We
value the stock at 5x FY2017E EV/EBITDA and arrive at a target price of Rs175.
We upgrade our recommendation on the stock to Accumulate.

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