Hindustan Zinc: Strong prospects getting priced in

Hindustan Zinc’s performance in the June quarter may have been softer than its record March quarter numbers with zinc and lead prices seeing some correction due to weak Chinese data. But, the company's overall prospects remain strong given the improved data for the month of June, which has led to a rebound in base metal prices in recent weeks. 

Zinc prices on the London Metal Exchange (LME) averaged at $2,596 in the June quarter, which was 35 per cent higher year-on-year (y-o-y), but were 6.6 per cent lower sequentially. Average lead prices, too, were 26 per cent higher y-o-y at $2,161, but 5.1 per cent down sequentially. Hence overall realisations were to get softer. But, prices are inching up again with zinc around $2,730 and lead at $2,198.

 
On volumes, too, the company continues to grow well with mined metal production at 233,000 tonne increasing 84 per cent y-o-y in the June quarter, driving integrated lead and zinc production higher by 81 per cent y-o-y and silver production by 30 per cent. While this was also on a low base as mining plans in FY17 were such that the June 2016 quarter saw lower mined metal production, production growth still beat analysts’ estimates. Zinc volumes were 7 per cent ahead of estimates at Motilal Oswal Securities.

Growing production, despite slightly soft realisations sequentially, helped revenues from operations, at Rs 5,013 crore, beat Bloomberg consensus estimates of Rs 4,869 crore. Earnings before interest, tax, depreciation and amortisation (Ebitda), at Rs 2,404 crore, was lower than consensus estimates of Rs 2,585 crore. Net profit, at Rs1,876 crore, thus also fell short of estimates of Rs 2,004 crore. 

 
Given the strong outlook for base metal prices and the company's rising production, Hindustan Zinc, which is among the lowest cost producers globally, stands to gain. The company also reiterated that the smelter debottlenecking and the fumer project (for additional silver, lead and zinc recovery) was progressing according to plan, and was on course to achieve its guidance of reaching 1.2 million tonne (mt) mined metal by FY20.  Analysts at

say they continue to remain positive on zinc prices, led by deficit due to the closure of (global) mining and smelting capacities. Analysts at Motilal Oswal Securities (MOSL) have already raised the LME assumption for zinc by $400 to $3,200 a tonne for FY19, as they say, zinc supply was getting tighter due to strong demand and a lag in supply response. 

 
After results, MOSL had given a target price of Rs 301. Valuing Hindustan Zinc at 7x Ebitda, analysts at Reliance Securities, too, have maintained a target price of Rs 301, but those at PhillipCapital have raised theirs to Rs 320. The stock was now trading at Rs 279.15, up 17 per cent in about a month, indicating that some of the expectations were getting priced in. Hence, investors can consider it on corrections.

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