COMPANY UPDATE

HINDUSTAN ZINC
The ‘silver’ lining
India Equity Research| Metals and Mining
COMPANYNAME
Hindustan Zinc’s (HZL) Q2FY19 operating numbers were a mixed bag EDELWEISS 4D RATINGS
compared to our estimates: 1) zinc (Zn) production was 3% lower as
Absolute Rating BUY
transition to underground mining at Rampur Agucha (RA) was extended; Rating Relative to Sector Outperform
2) lead volumes fell 3% due to retrofitting at Dariba smelter; and 3) silver Risk Rating Relative to Sector Low
volume was higher due to better-than-expected grades. Going ahead, we Sector Relative to Market Underweight
expect improved performance on volume as well as cost due to material
haulage through shafts at RA and SK mines. Taking cognizance of revised
USD:INR at 70/72 (earlier 68/69) FY19/FY20E and LME Zn at MARKET DATA (R: HZNC.BO, B: HZ IN)
USD2,700/USD2,500 (earlier USD2,782/USD2,600), we keep our CMP : INR 278
Target Price : INR 327
FY19E/FY20E EPS broadly unchanged. Maintain ‘BUY’ at unchanged TP of
52-week range (INR) : 340 / 261
INR 327. The stock is trading at 9.9x FY20E EPS.
Share in issue (mn) : 4,225.3
M cap (INR bn/USD mn) : 1,173 / 15,872
A quarter mostly spent in transition Avg. Daily Vol.BSE/NSE(‘000) : 1,966.0
As expected, Q2FY19 Zn volumes were impacted by temporary mismatch in Zn mined
metal availability, though mine production ramped up in September 2018. On the lead SHARE HOLDING PATTERN (%)
front, retrofitment of pyrometallurgical smelter resulted in lower volumes in July, Current Q1FY19 Q4FY18
though they improved August 2018 onwards. Going ahead, we expect RA underground Promoters * 64.9 64.9 64.9
operations to stabilise with mid shaft loading system permitting higher volumes until MF's, FI's & BK’s 32.0 31.6 31.1
off shaft is fully commissioned. Higher silver volumes were a positive surprise and the FII's 1.8 2.0 2.3
run rate was in line with the company’s guidance for FY19 due to better grades. Others 1.3 1.5 1.7
* Promoters pledged shares : NIL
Expect volume uptick and lower cost Q3FY19 onwards (% of share in issue)

Despite an operationally lean Q2FY19, we are optimistic on volume and cost as: 1) off-
PRICE PERFORMANCE (%)
shaft commissioning (Q4FY19) and mid-shaft loading (Q2FY19 end) will boost RA
EW Metals
mine’s volumes; 2) material hoisting from SK shaft in Q3FY19 will reduce haulage cost; Stock Nifty and Mining
3) 2mtpa mill at Zawar (Q4FY19) will aid downstream refining; and 4) higher Zn Index
volumes post commissioning of fumer at Chanderia Q3FY19 onwards. 1 month (8.2) (11.1) (8.5)
3 months (2.3) (5.1) 0.6
Outlook and valuations: Better times ahead; maintain ‘BUY’ 12 months (13.6) 3.1 (9.4)
We perceive imminent benefits of operating leverage at HZL from commissioning of
shafts at RA and SK mines by Q4FY19 and evidently better silver volumes. Taking
cognizance of revised USD:INR and LME Zn estimates, our FY19/FY20E EPS is
unchanged. Maintain ‘BUY/SO’ with TP of INR 327 (exit multiple of 11.7x FY20E EPS).
Financials (INR mn)
Year to March FY17 FY18E FY19E FY20E
Net revenue 187,980 225,210 261,787 285,590 Amit A Dixit
+91 22 6620 3160
EBITDA 97,384 127,090 153,171 165,028
amita.dixit@edelweissfin.com
Adjusted Profit 83,156 95,328 111,633 118,400
Diluted equity shares (mn) 4,225 4,225 4,225 4,225 Meera Midha
+91 22 4088 5804
Adjusted diluted EPS (INR) 19.7 22.6 26.4 28.0 meera.midha@edelweissfin.com
EPS Growth (%) 1.8 14.6 17.1 6.1
EV/EBITDA (x) 8.8 7.5 5.8 5.0
ROAE (%) 24.4 28.6 28.3 25.3 October 15, 2018
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Metals and Mining
Table 1: HZL Q2FY19 Zinc and Lead production volumes were lower compared to estimates
Q2FY19A Q2FY19E % diff Q2FY18 % diff Q1FY19 % diff Comments
HZL
Mined metal content 232 239 (3.0) 219 5.9 212 9.4
Zinc production was down due to transition of RA
Integrated Metal 211 218 (3.0) 230 (8.3) 214 (1.4)
mine from open pit to underground operations.
Zinc 162 167 (3.2) 192 (15.6) 172 (5.8)
Lead production was higher due to retrofitting of
Lead 49 50 (2.5) 38 28.9 42 16.7
pyro metallurgical smelter and SK mine ramp up
Silver 172 150 14.7 140 22.9 138 24.6
Source: Company, Edelweiss research

Table 2: Change in Estimates

FY19E FY20E
New Old % change New Old % change Comments
Net revenue 261,787 262,578 (0.3) 285,590 285,476 0.0 Estimates changed inline with
EBITDA 153,171 153,792 (0.4) 165,028 164,968 0.0 revised USD:INR and LME Zn
EBITDA margin 58.5 58.6 57.8 57.8 estimates
Adjusted PAT 111,633 112,220 (0.5) 118,400 118,592 (0.2)
Net profit margin 42.6 42.7 41.5 41.5
Capex 28,000 27,200 2.9 28,800 27,600 4.3
Source: Edelweiss research

2 Edelweiss Securities Limited

 Hindustan Zinc

Company Description
HZL is a part of the Vedanta Group and is the only integrated zinc manufacturer in India,
with zinc smelting capacity of 823 ktpa and lead smelting capacity of 185 ktpa. The company
is the second-largest integrated zinc and lead producer in the world. It caters to ~80% of
zinc demand in India. The company’s fully-integrated zinc operations include three lead-zinc
mines, two zinc smelters, a lead smelter, and one lead-zinc smelter in Rajasthan. HZL’s
mines supply most of its concentrate requirements.

Investment Theme
Continued supply constraints following mine closures provide a stable growth outlook for
Zinc going forward. Further, volume ramp in the forecast period will result in benefits of
operating leverage. We like HZL for its ability to deliver ~50% EBITDA margins and maintain
good dividend yield. It is among the lowest cost in the world and has a strong Balance Sheet
with no debt. We maintain BUY/SO’ with TP of INR385, implying P/E of 12.7x FY20E.

Key Risks
• HZL’s share price is sensitive to LME zinc prices. Lower-than-estimated LME prices in
the event of a demand slowdown or oversupply will adversely impact the company’s
earnings.
• Lower than expected volume growth

• INR appreciation and/or lower metal premiums

3 Edelweiss Securities Limited

 Metals and Mining

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Macro Net revenue 187,980 225,210 261,787 285,590
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Materials costs 57,436 63,890 71,728 81,121
Inflation (Avg) 4.5 3.6 4.5 5.0 Accretion to stock (3,141) - - -
Repo rate (exit rate) 6.3 6.0 6.0 6.5 Mining Royalty 22,692 26,470 28,507 30,892
USD/INR (Avg) 67.1 64.5 70.0 72.0 Employee costs 7,220 7,760 8,381 8,548
Sector Total SG&A expenses 6,389 - - -
Zinc LME (USD/t) 2,366.0 3,057.0 2,700.2 2,500.0 Total operating expenses 90,596 98,120 108,616 120,561
Lead LME (USD/t) 2,001.7 2,379.0 2,127.4 2,000.0 EBITDA 97,384 127,090 153,171 165,028
Copper Tc/Rc (c/lb) 22.0 22.0 22.0 22.0 Depreciation 18,112 14,830 17,457 19,617
Company EBIT 79,272 112,260 135,714 145,411
Zinc production (t) 671,990 791,000 838,750 921,760 Less: Interest Expense 2,017 2,830 24 -
Lead production (t) 144,294 168,000 166,500 203,500 Add: Other income 24,737.2 17,510.00 15,165.74 19,033.14
Silver production (kg) 488,750 558,000 650,000 750,000 Profit Before Tax 101,992 129,340 150,856 164,445
Zinc premium (USD/t) 357 346 330 323 Less: Provision for Tax 18,837 32,210 39,222 46,044
Lead premium (USD/t) 298 287 274 268 Add: Exceptional items - 2,400 - -
Mining & mfg cost(INR/t) 70,363 66,621 71,353 72,091 Reported Profit 83,156 97,130 111,633 118,400
Zinc royalty (%) 13.0 13.0 13.0 13.0 Exceptional Items - 1,802 - -
Lead royalty (%) 18.9 18.9 18.9 18.9 Adjusted Profit 83,156 95,328 111,633 118,400
Employee exp. growth (%) 0.2 12.0 8.0 2.0 Shares o /s (mn) 4,225 4,225 4,225 4,225
SG&A expenses growth (%) 1.0 3.0 3.0 3.0 Adjusted Basic EPS 19.7 22.6 26.4 28.0
Depreciation rate (%) 10.4 7.2 7.5 7.5 Diluted shares o/s (mn) 4,225 4,225 4,225 4,225
Tax rate (%) 20.0 24.0 26.0 28.0 Adjusted Diluted EPS 19.7 22.6 26.4 28.0
Dividend payout (%) 179.3 43.7 36.0 36.0 Adjusted Cash EPS 23.2 27.4 31.9 34.0
Capex (INR mn) 23,625 24,062 28,000 28,800 Dividend per share (DPS) 29.4 8.0 7.9 8.4
Net borrowings (INR mn) (320,703) (221,170) (283,665) (350,773) Dividend Payout Ratio(%) 179.3 43.7 36.0 36.0
Debtor days 4 3 3 3
Inventory days 95 95 95 95 Common size metrics
Payable days 45 45 45 45 Year to March FY17 FY18 FY19E FY20E
Cash conversion cycle 54 52 52 52 Operating expenses 48.2 43.6 41.5 42.2
Depreciation 9.6 6.6 6.7 6.9
Interest Expense 1.1 1.3 - -
EBITDA margins 51.8 56.4 58.5 57.8
Net Profit margins 44.2 42.3 42.6 41.5

Growth ratios (%)

Year to March FY17 FY18 FY19E FY20E
Revenues 32.1 19.8 16.2 9.1
EBITDA 47.3 30.5 20.5 7.7
PBT 18.5 26.8 16.6 9.0
Adjusted Profit 1.8 14.6 17.1 6.1
EPS 1.8 14.6 17.1 6.1

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 Hindustan Zinc
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 8,451 8,451 8,451 8,451 Operating cash flow 162,266 29,276 115,544 119,500
Reserves & Surplus 299,600 350,872 422,317 498,093 Financing cash flow (193,889) (122,708) (40,902) (42,624)
Shareholders' funds 308,051 359,323 430,768 506,544 Investing cash flow 115,110 29,055 (12,834) (9,767)
Total Borrowings 80,005 690 - - Net cash Flow 83,487 (64,377) 61,808 67,109
Long Term Liabilities 1,697 57,640 57,640 57,640 Capex (23,625) (24,062) (28,000) (28,800)
Def. Tax Liability (net) 6,677 (22,080) (16,340) (10,600) Dividend paid (270,758) (40,563) (40,188) (42,624)
Sources of funds 396,430 395,573 472,068 553,584
Gross Block 174,413 204,760 232,760 261,560 Profitability and efficiency ratios
Net Block 98,655 111,810 122,353 131,536 Year to March FY17 FY18 FY19E FY20E
Capital work in progress 30,713 32,200 32,200 32,200 ROAE (%) 24.4 28.6 28.3 25.3
Intangible Assets 1,275 1,210 1,210 1,210 ROACE (%) 27.3 34.7 38.2 35.1
Total Fixed Assets 130,643 145,220 155,763 164,946 Inventory Days 101 95 85 95
Non current investments 40,822 20,590 20,590 20,590 Debtors Days 4 3 2 2
Cash and Equivalents 321,630 221,860 283,665 350,773 Payable Days 67 61 51 45
Inventories 19,358 13,790 19,434 22,793 Cash Conversion Cycle 38 36 35 52
Sundry Debtors 1,360 1,840 1,631 2,156 Current Ratio 2.9 20.7 23.8 32.7
Loans & Advances 18 10 10 10 Gross Debt/EBITDA 0.8 - - -
Other Current Assets 4,128 3,930 3,930 3,930 Gross Debt/Equity 0.3 - - -
Current Assets (ex cash) 24,864 19,570 25,005 28,889 Adjusted Debt/Equity 26.0 0.2 - -
Trade payable 12,051 9,470 10,760 9,420 Net Debt/Equity (78.4) (61.6) (65.9) (69.2)
Other Current Liab 109,478 2,197 2,197 2,197 Interest Coverage Ratio 3,930.4 3,966.8 560,832.8 -
Total Current Liab 121,530 11,667 12,957 11,617
Net Curr Assets-ex cash (96,665) 7,903 12,048 17,272 Operating ratios
Uses of funds 396,430 395,573 472,068 553,584 Year to March FY17 FY18 FY19E FY20E
BVPS (INR) 72.9 85.0 101.9 119.9 Total Asset Turnover 0.5 0.6 0.6 0.6
Fixed Asset Turnover 1.9 2.1 2.2 2.2
Free cash flow (INR mn) Equity Turnover 0.6 0.7 0.7 0.6
Year to March FY17 FY18 FY19E FY20E
Reported Profit 83,156 97,130 111,633 118,400 Valuation parameters
Add: Depreciation 18,112 14,830 17,457 19,617 Year to March FY17 FY18 FY19E FY20E
Interest (Net of Tax) 1,644 2,125 18 - Adj. Diluted EPS (INR) 19.7 22.6 26.4 28.0
Others (27,485) (36,184) (9,419) (13,293) Y-o-Y growth (%) 1.8 14.6 17.1 6.1
Less: Changes in WC (86,838) 48,626 4,145 5,224 Adjusted Cash EPS (INR) 23.2 27.4 31.9 34.0
Operating cash flow 162,266 29,276 115,544 119,500 EV / Sales (x) 4.5 4.2 3.4 2.9
Less: Capex 23,625 24,062 28,000 28,800 EV / EBITDA (x) 8.8 7.5 5.8 5.0
Free Cash Flow 138,641 5,214 87,544 90,700

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Hindustan Zinc 15,872 10.5 9.9 5.8 5.0 28.3 25.3
Korea Zinc Co Ltd 6,506 11.7 10.8 5.0 4.8 10.0 10.2
Teck Resources Ltd 15,017 9.2 9.3 4.3 4.5 12.5 10.1
Median - 10.5 9.9 5.0 4.8 12.5 10.2
AVERAGE - 10.4 10.0 5.0 4.8 13.9 12.7
Source: Edelweiss research

5 Edelweiss Securities Limited

 Metals and Mining

Additional Data
Directors Data
Agnivesh Agarwal Chairman Navin Agarwal Director
A R Narayanaswamy Director Reena Sinha Puri Director
Sunil Duggal CEO & Whole-time Director Farida M. Naik Director
Arun L. Todarwal Director Sudhir Kumar Director

Auditors - Deloitte Haskins & Sells

*as per last annual report

Holding – Top10
Perc. Holding Perc. Holding
Vedanta limited 64.99 Government of india 29.54
Janus henderson grou 0.29 Goldman sachs group 0.23
Vanguard group 0.2 Uti asset management 0.18
L&t investment manag 0.05 Swedbank ab 0.04
State street corp 0.04 Pictet funds 0.04
*in last one year

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available
*in last one year

6 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Coal India BUY SP M Hindalco Industries BUY SO M
Hindustan Zinc BUY SO L Jindal Stainless Ltd BUY SO H
Jindal Steel & Power BUY SO M JSW Steel BUY SO M
NMDC BUY SO M Steel Authority of India BUY SP M
Tata Steel BUY SO M Vedanta BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

7 Edelweiss Securities Limited

 Metals and Mining

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f2
0bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c
89e548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.10.15 12:58:54 +05'30'

Coverage group(s) of stocks by primary analyst(s): Metals and Mining

Coal India, Hindalco Industries, Hindustan Zinc, Jindal Stainless Ltd, Jindal Steel & Power, JSW Steel, NMDC, Steel Authority of India, Tata Steel, Vedanta

Recent Research

Date Company Title Price (INR) Recos

12-Oct-18 Metals & China exports volume – Rosy

Mining for steel, thorny for
aluminium; Sector Update
10-Oct-18 Metals and Zinc: Rebound likely to be
Mining short lived; Sector Update
09-Oct-18 JSW Steel Bigger and better ; 371 Buy
Company Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
(INR)

350
297 320

149 290
(INR)

- 260
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

230

200
Dec-17

Aug-18
Oct-17

Oct-18
Apr-18
Nov-17

May-18

Sep-18
Feb-18
Jan-18

Mar-18

Jun-18

Jul-18

Hindustan Zinc

8 Edelweiss Securities Limited

 Hindustan Zinc
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Metals and Mining

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10 Edelweiss Securities Limited

 Hindustan Zinc

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