Hindustan Zinc (HZL) posted a significant 38% decline in topline to Rs1,031 crore (Rs1,658 crore) for Q3FY2009, which was in line with our estimate of Rs1,025 crore.
Topline de-grew primarily on account of the steep fall in LME–Zinc and Lead prices and decline in the realizations of bye-products. The LME Zinc and Lead prices averaged at $1,207 and $1,241, lower by 55% and 62% y-o-y respectively, during the quarter.
Revenues de-grew despite jump in the sales volumes of Zinc and Lead, which grew by 45% and 6%, respectively. For 9MFY2009, HZL’s Net Sales declined by 21.3% y-o-y to Rs4,419 crore (5,612 crore).
On the Operating front, HZL reported a decline in margins by a substantial 3,700bp to 25.9% (63%) mainly due to sharp fall in realizations led by tumbling LME Zinc and Lead prices.
Raw material costs of coal, copper sulphate and grinding media were higher y-o-y during the quarter. The increase in staff costs during the quarter also added to the Margin fall.
HZL plans to expand its Zinc-Lead capacity to 1.06mn tonnes, making it one of the world’s largest Zinc-Lead integrated companies by 2010.
In line with the group’s philosophy of being a fully self-reliant producer of power, a captive thermal power plant with a capacity of 160MW will also be set up at Rajpura Dariba, taking its total power capacity to 518.2MW by 2010.
On expanded power capacity, HZL will be able to source 90% of its power requirements from the captive power plant (CPP).
At Rs332, HZL is trading at a P/E of 5.7x and 8.3x FY2009E and FY2010E earnings, respectively. However, it is trading at EV/EBIDTA of 1.9x and 2.5x FY2009E and FY2010E EBIDTA, respectively.
In the last downcycle (2002-2003) when the LME-Zinc prices were hovering in the range of US $850-900/tonne, HZL traded at an average P/E of 3-4x and traded at EV/EBIDTA of 2-3x.
We have assigned the down-cycle average EV/EBIDTA of 2.5x to HZL and arrived at a fair value of Rs333 (Rs364.) Hence, on account of the weak Zinc outlook going forward due to the expected surplus of Zinc over the next two years and HZL’s falling margins, we remain NEUTRAL on the stock.