hindustan zinc ltd| metals & miningbreport.myiris.com/rkgssl/hinzinc_20111017.pdf · initiating...

R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 1

Hindustan Zinc Ltd| Metals & Mining

Initiating Coverage| 17th October, 2011

18.98

Market Data*

Bloomberg Code HZ IN Reuters Code HZNC.BO Sensex/Nifty 17025.09/5118.25 Dividend Yield (%) 0.85 52 Week High/Low 155.3/108.6 Equity Capital(` mn) 8450.64 Face Value (`) 2 Market Cap (` mn) 497320.5 Avg.10 day NSE Vol. 938080 Source: Ace Equity, R K Global Research, *as on’16” Oct”

Key Market Ratio* Latest TTM EPS (`) 13.03 Book Value (`) 56.87 TTM PE (x) 9.03 TTM PBV (x) 2.07 EV/TTM EBITDA (x) 6.09 EV/TTM Sales (x) 4.09 Market Cap/TTM sales (x) 4.61 Source: Ace Equity, R K Global Research, *as on’16” Oct”

Share-Holding Pattern (%)*

Source: Ace Equity, R K Global Research **as on ’16” Oct”

HZL vs Sensex

65%

1%

31%

3% Promoters Public FIIs Others

80

90

100

110

120

130

140

150

02-Aug-10 02-Nov-10 02-Feb-11 02-May-11 02-Aug-11

SENSEX HZL

Investment Rationale Silver’s contribution towards top line to grow from 6% to 16%. HZL is

focusing on increasing its silver production to become the Asia’s largest and

world sixth largest silver producing company by 2013 with the total

production of 500 tons/annum. It has commissioned 1.50mtpa concentrator

at Silver-rich Sindesar Khurd mine in the last quarter of FY11 where silver

occurrences are at levels of 180 ppm (parts per metre). It is expected that

topline business from the silver business grow from `5430mn in FY 11 to

`21169mn in FY13 and its total contribution to the HZL business will enhance

from current 6% to ~16% by FY13E.

Profitability to remain strong, expect EPS to grow at `14 and `16 in FY12

and FY13 respectively: HZL has maintained average PBITDM of ~53% from

last 3 years and we expect that margins will grow at an average rate of 63% in

next two years with improvement in utilization rate to 81%-87% from 73% in

FY11 coupled with operational efficiency, low tax rate, higher ROI. We are also

positive on the prices of the metals which will move the profitability of the

company. It is expected that the EPS will grow to `14 and `16 in FY12 and

FY13 respectively from current `12 in FY11.

Strong reported Balance: HZL has consistently generated strong cash flow

which helped it to fund its capex plan from its internal accrual without raising

debts. The company total cash reserve has increased by 25% in FY11 to

`149650mn with `93320 in mutual funds and `55550mn in FD. Total cash

balance of the company is expected to increase at CAGR of ~7.4% to

`65034mn in FY13E from `56329mn in FY11. We expect that the operating

cash flow of the company will further improve and will grow at CAGR of ~24%

by FY13 to `73624mn from `47763mn in FY11 with the reduction in the

interest cost on debt which stood at `439mn in FY10, came down by ~55% in

FY11 to `194 as the company debt almost reduced to zero level in FY11.

Valuation:

At current market price of `121.95, the stock is trading at EV/EBITDA of

~5.5x of its FY13E, EBITDA of `79732mn. We believe that the stock deserve

premium as the company is largest producer of zinc and expected to gain from

its silver business. We expect to see upside in the coming years with its strong

fundamentals and zero debt with substantial cash reserves on its books. We

initiate a “BUY” rating on the HZL stock with target price of ` 159, an

upside potential of ~30%, using EV/EBITDA of 6.5x FY13E.

CMP-`121.95 “Buy” TP-`159

Research Analyst:

Sweety Singh

[email protected]

Particulars 2009-10 2010-11 2011-12E 2012-13E

Total Revenue (ìn mn) 84378.7 104898.2 119041.9 135751.2 EBITDA (ìn mn) 46700.8 54859.0 69195.5 79732.6 PAT (ìn mn) 40414.1 49004.9 58581.4 67755.7 EPS (`) 6.5 11.6 13.9 16.0 EPS Growth (%) -38.0% 79.7% 19.5% 15.7% BVPS (`) 42.9 53.3 63.9 76.1 P/E (x) 18.9 10.5 8.8 7.6 EV/EBITDA (x) 10.8 8.4 6.4 5.5 ROE (%) 22.8% 22.6% 22.4% 21.6%

*Computed based on CMP of `121.95


Hindustan Zinc | Metals & Mining

Company Background HZL is India's largest and world's second largest integrated producer of zinc & lead, with a global share of

approximately 6% and domestic share of 80% in zinc. It produces Zinc, Refined Lead, Silver, Cadmium and Sulphuric

acid. The core business comprises of mining and smelting of zinc and lead along with captive power generation.

Company has four mines and four smelting operations: mines are situated at Rampura Agucha (largest zinc producing

mine in the world), Sindesar Khurd, Rajpura Dariba and Zawar in Rajasthan; while the smelters are located at

Chanderiya, Debari and in Rajasthan and Vizag in Andhra Pradesh. The company’s current metal production capacity

stood at 964Ktpa (879Ktpa of zinc and 85Ktpa of lead) whereas ore production capacity stands at 8.60Mtpa. HZL also

owns 474MW coal based thermal captive power plant in Rajasthan for captive use and 123.2 MW wind energy in

Gujarat and Karnataka, which is sold to the respective state grids. In beginning of 2011, Sterlite has completed the

acquisition of Anglo American Skorpion Zinc assets through its subsidiary Sterlite Infra which will add 400,000 tons

of metal to HZL’s portfolio. It has successfully commissioned Hydro Zinc smelter in Dariba Smelting Complex, in

March’10.

Smelters (Ktpa) CPP (MW) WPP (MW) Chanderiya 610 Chanderiya 234 Samana 88.8 Debari 88 Zawar 80 Gadag 34.4 Vizag 56 Dariba 160 Mokal 35.7 Dariba 210 Gopalpura 12 Total 964 474 170.9

Source: Company, R K Global Research

HZL Mine Type of mine Capacity (mtpa) R & R (mt) Life Rampura Agucha Open Cast 6.15 114 20 Sindesar Khurd Underground 1.5 67 40 Rajpura Dariba Underground 0.9 49 47 Zawar Underground 1.2 65 51 Total

9.75 295


Corporate Ownership




HZL Segment –Wise – Revenue FY (2010)

Source: Company, R k Global Research

Production Data FY06 FY07 FY08 FY09 FY10 FY11 Mined Zinc (Kt) 472.5 504.9 551.2 651.4 682.7 739.2 Mined Lead (Kt) 59.6 67,364 77,724 83,802 85,848 88704 Refined Zinc (Kt) 282.6 348.3 426.3 551.7 578.4 712 Refined Lead (Kt) 24.7 50.1 63.5 65.3 71.6 63 Refined Silver (kg) 29.9 89.3 115.9 131.7 176.3 179 Source: Company ,R K Global Research

Milestone Achieved

FY2011- Commissioned 1.50mn ton per annum concentrator at Sindesar Khurd Mine

Commissioned 160MW(80*2)CPP at Dariba Smelting Complex

48MW addition in Wind Power Generation

FY2010- Rampura Agucha expansion of 1mn tonne p.a achieved.

Commissioned 210,000 tons p.a Hydrometallurgical Zinc Smelter at Rajpura Dariba

FY2009 Commissioned 80MWCPP at Zawar Mines and 34.4MW Wind Power

Rampura Agucha expansion of 1.25mn tonne p.a achieved.

88000 tons p.a zinc debottlenecking completed at Chanderiya Smelting Complex & Debari Zinc

Smelter

Industry Outlook

Zinc After a 5% y-o-y decline in consumption in 2009, global

zinc demand rose by 4% y-o-y in 2010 driven by strong

demand for the metal by the dragon nation on the back of

restocking. It is expected that the demand for the metal

will continue to grow at ~6% in 2011 and 2012, followed

by moderation in 2013 & 2014 period due to bottleneck in

supply from China as the mine life expectancy will come to

an end for the projects like Brunwick having capacity of

200Kt, Century with 500Kt, Antamina with 200Kt. On

supply side, refine production in 2010 was up by 2% y-o-y

to 514Kt. China, which accounts for 30% of the world zinc

supply, has plans to close around 400Kt of smelter capacity

over the next three years due to which supply tightening will be seen after 2012. In terms of prices, Zinc prices have

rallied in line with the strong price trends in the other base metals, but the metal is currently only about half its pre-

45%

25%

7%

23%

Construction

Transportation

Industrial Machinery

Consumer products and Electricals

Source: LME,R K Global Research

End Use of Zinc

72%

8%

11%

4%1%

4%Zinc Metal

Lead Metal

Zinc and Lead Concentrate

Silver

Sulphuric Acid

Others



recession value. In May 2006, prices touched $4,600/ton; in the depths of the recession prices slid to just over

$1000/ton, averaging at $1595/ton in 2009, which is currently trading at an average rate of $2277/ton till Q2FY12.

India is one of the fastest growing regions in zinc consumption in the world. It is estimated that India’s zinc demand is

likely to grow at 12-15% annually as compared to the global average of 5%. On production side, India has ~5% share

in the zinc smelter capacity in the Asia-Pacific region. Hindustan Zinc is the only major producer of zinc in India with

market share of 80%.

Lead Global demand is expected to grow by ~3% to 9231Kt in 2011E from the current demand of 8993Kt in 2010. It is

assumed that the consistent demand will reduce the surplus of the inventory level of metals. Again, China which is the

major player in the Lead consumption contribute around 30% for the market of this metal and the rising automobile

consumption is growing at a pace which will

support the growth of the market for the lead.

Increased sales and exports of both original

equipment and replacement lead‐acid batteries

together with higher demand from the e‐bike sector

are expected to result in a further rise in Chinese

usage of 8.6%. In Europe, it is anticipated that usage

will rise by 6.3% and in the United States, by 1.7%.It

is expected that global lead mine production will

grow primarily due to the higher output in emerging

nation. The increase in the production will be

influenced by the commissioning of Hindusthan Zinc

Rajpura Dariba operation in Rajasthan and Johnson

Controls’ Enertec plant in Monterrey, Mexico. In addition, Australian production is expected to recover after a

reduction in 2010 caused by technical problems at Nyrstar’s Port Pirie smelter.

World Lead Demand Supply

(in Kt) 2006 2007 2008 2009 2010 2011E Supply 7,890 8,230 8,620 8,896 9,261 9,602 YOY (%) 4.31 4.74 3.20 4.10 3.68 Demand 8,017 8,243 8,665 8,669 8,993 9,231 YOY (%) 2.82 5.12 0.05 3.74 2.64 Surplus (127.00) (13.00) (45.00) 227.00 268.00 371.00

LME prices($/ton) 1040.00 1424.00 2860.00 1657.00 1982.00 102693.50

Source: Abare ,R K Global Research

We expect that the prices of the metal will be stable in 2011 as the global supply of refined lead metal will exceed

demand by 1, 23,000 tons in 2011

World Zinc Demand Supply

(in Kt) 2006 2007 2008 2009 2010 2011E

Production 10655 11360 11655 11287 11738 12267

YOY (%) 7% 3% -3% 4% 5%

Consumption 11016 11307 11438 10854 11505 12253

YOY (%) 3% 1% -5% 6% 6%

Stock 548 580 764 440 520 500

LME Price($/ton) 3276 3243 1878 1595 1965 2005

Source: Abare , R K Global Research

77%

6%

2% 3%8%

3%

Batteries

Cable Sheathing

Rolled and extruded

Shot/Ammunition

Alloys

Pigments

MiscelleneousSource:Company, R K Global Research



Silver Demand for the silver is growing as it is extensively used in Jewellery, photography and electrical and medicines.

Besides demands for investment, demand from industrial is also expected to be positive which will push silver prices

higher in the longer term. Its fabrication demand rebounded strongly by 20% in FY10 after 17% contraction in 2009.

On the supply side it has grown at a CAGR of ~6% in FY11 to 30508Kgs from 24366Kgs in FY06. Hence, we expect

that the investment demand for silver will grow at 5% in 2011 on the back of uncertainty in the US market and the

fear of European debt crisis will contribute

towards the prices of silver. Apart from these

we are optimistic on the growth of the

emerging market which will boost the

demand of silver from the industry. Silver as a

precious metal gained 50% over the year at

`63167mn in April FY11 compared to

`27512mn in corresponding period of FY10.

In the past two years, silver had

underperformed the market and is now

playing a catch-up due to rising industrial

usage of the metal, rising base metals prices.

Investment Thesis

World largest Zinc Producer in the world HZL is considered to be one of the largest producers in the world when compared to the rest of the peers. The

company zinc production capacity has been doubled to 879Kt in FY11 from 411Kt in FY06 and the company is able to

meet the 7% requirement of the world.

(in Kgs) 2004 2005 2006 2007 2008 2009 2010

Global production 22,892 24,217 24,366 24,432 24,982 28,812 29494

YOY % 5.79% 0.62% 0.27% 2.25% 15.33% 2.37%

Global consumption 25,477 25,620 22,877 23,060 22,687 23,511 26928

YOY % 0.56% -10.71% 0.80% -1.62% 3.63% 14.53%

Source: MCX,R K Global Research

46%

7%16%5%

9%

17%

Silver Application

Industrial Application

Photography

Jewellery

Silverware

Coins and medals

Investment

Source:LME, R K Global Research

712

640

365335 314

0

100

200

300

400

500

600

700

800

HZL Xstrata Votorantim Glencore New Boliden

Kt

Top Zinc Producing Companies in the world

Source:Company,R K Global Research



We expect that HZL will benefit from the expansion plans by replacing import in the zinc deficit Indian market and

will win more market share. With the expansion plan at mines and the smelters in coming years, we expect that the

total refined zinc volume will grow at a CAGR of 17% to 1065Kt by FY13E from 775Kt in FY11. We expect that with

the volume enhancement, revenue will also grow at a CAGR of ~13.7% to `135751mn by FY13E from `104898mn in

FY11.

Capacity Expansion to add value for the company In FY10, the company has successfully commissioned Hydrometallurgical zinc at Rajpura Dariba Smelting Complex

and the 1mn tons p.a concentrator at Rampura Agucha in FY10. To support the increased capacity of smelter in FY11,

they have successfully commissioned 1.50mn tons p.a concentrator at Silver-rich Sindesar Khurd Mine in the last

quarter of FY11. Is lead smelter plant was also succefully completed in Q2FY12 as planned by the company. Along

with the smelting and the mining, HZL is also in the process to enhance its CPP capacity by commissioning 160 MW

(80X2) at Dariba Smelting Complex increasing the total Captive power generation capacity to 474 Mw. Such addition

of captive power plant will cut the cost of production of the company as the firm will not have to be dependent on the

sourcing of power. The company has planned to exit the silver production capacity upto 500 tons by FY13. Further it

has added 105MW in existing Wind Power generation capacity during Q2FY12 and the rest 45Mw is expected to be

commissioned by Q3FY12 which will increase the total wind power generation capacity at 273Mw at total cost of

$190mn which will accelerate the revenue from wind power plant. Their current Zinc-Lead metal production capacity

is 964,000 tons p.a (879,000 tons of zinc and 85,000 tons of lead). To enhance the business operation, it expansion

plans are progressing well and is likely to be commissioned between FY12- FY13.

Project at HZL Existing Capacity Addition Post addn cap Timeline

New Kayar Mining Project NIL 0.3 mtpa 0.3 Mtpa Q3 2013

Lead Smelter at Dariba 310 100Ktpa 410Ktpa Completed(Q1FY12)

Wind Power Project 123.2 150Mw 273.2Mw Q3FY12


0

100000

200000

300000

400000

500000

600000

700000

800000

900000

FY06 FY07 FY08 FY09 FY10 FY11

411000 411000

581000

669000

879000 879000

In M

t

Production Capacity at HZL almost doubled

Zinc Lead




Silver’s contribution towards top line to grow from ~6% to ~16% by FY13 HZL is focusing on increasing its silver production and become the Asia’s largest and world sixth largest silver

producing company by 2013 with the total production of 500 tons/annum with commissioning of 1.50mn tons p.a

concentrator at Silver-rich Sindesar Khurd Mine in the last quarter of FY11 where silver occurrences are at levels of

200 ppm. With this we expect that revenue from the silver business will grow from `5430mn in FY 11 to `21169mn

in FY13 and its total contribution to the HZL business will enhance from current 6% to ~16% by FY13E. Silver

realization for Q4 and FY 2011 was `2180mn and `.5440mn respectively, up 98% and 58%, compared with the

corresponding prior period. The rising Silver prices will be a major boost to HZL profitability at the same cost of

production. Currently, around 77% of India’s annual silver demand is met through imports. At present, Hindustan

Zinc’s domestic market share in Silver is 2.5%. Post-augmentation of the capacity, it is likely to be Asia’s largest

primary silver producer. We expect that the silver business could be a major trigger for the companies’

valuation.

Dominant Player at low cost of production, unaffected by the coal price hike HZl is one of the largest integrated players of Zinc –Lead business with domestic market share of 80% with global

market share of approximately 6%. The company is well poised with the total reserves of 313.2 mn ton and has CPP of

474Mw. It has the world largest zinc mine at Rampura Agucha with reserves and resources of 120.4 mn tons. In India,

there is only one competitor Binani Zinc which has capacity to produce 14Ktpa of Zinc compared to 879Ktpa of HZL.

Further, HZL is considered to be the lowest cost producer of Zinc compared to others as it has its own captive mines

and power plant which help them to lead the market. HZL unit cost of production of Zinc in FY11 stood at $808/ton

0

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20000

30000

40000

50000

60000

0

50000

100000

150000

200000

250000

300000

350000

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

(Rs/

kg)

(in

kg)

Refined Silver Grew at CAGR of 19% by FY 11.

Refined Silver Avg Silver Prices

1%

3%

5%

7%

9%

11%

13%

15%

17%

19%

2000

22000

42000

62000

82000

102000

122000

142000

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

`M

n

Contribution of Silver to HZL Revenue

HZL Revenue Silver Contribution (%)Source:Company,R K Global Research



compared to $698/ton of FY10. Although the company has experienced increase in COP in FY11, was on account of

increase in Gratuity ceiling, and appreciation of INR against USD and the higher royalties of $182 per tonne. But the

cost is still comparatively very low when compared with the global cost of $1750per tonne in 2010. It is also not much

impacted due to the price hike of Coal India as the company import around 65% to 70% from oversees whereas in

India it source from linkage only for 25% to 30%. The company has also benefit of sourcing coal from Madanpur

South Coal Company from where it has access of around 31.5mn tons of coal through JV having ownership interest of

18.05%.

Rampura Agucha-one of the cost efficient Zinc Mines

HZL has the one of the most cost efficient mine at Rampura Agucha with an annual ore production capacity of 6.15mn

tons and world class zinc lead deposit of 120.4mn tons.

In FY 11, Rampura Agucha produced 677 Kt of

contained zinc and 68Kt of contained lead in FY11

surge by 10% and 23% respectively compared to

previous year. Its ore production capacity increased

from 5.0mtpa to 6.0mtpa due to the the successful

commissioning of 1mtpa concentrator in March 2010.

Rampura Agucha is also one of the lowest cost zinc

producer globally due to its rich ore grade which allows

the mine a high recovery and overall low cost of

production. It is expected that the mine will produce

ore of around 725Kt by 2020 which will be highest

among the peers. HZL source 90% of its requirement

from Rampura Agucha mines.

Exploration activities unfold reserves and

resources The company ongoing exploration activities have yielded

significant success with the gross addition of 22.1mn tons

to reserves and resources, prior to a depletion of 7.5mn

tons in FY11. Total contained zinc-lead metal has

increased by 1.4mn tons, prior to a depletion of 0.84mn

tons during the same period. Total reserves and resources

as at 31st March 2011 were 313.2 mn tons containing

34.7 mn tons of Zinc-Lead metal and 885 mn ounces of

Silver. In FY 2011, a total of 68,200 meters of core and

non-core drilling was completed at various exploration

sites throughout the mines and tenement. Significant R&R

additions of 18.96 mn tons were reported from Rajpura

Dariba belt and Zawar mine.

Reserves

Grade % Grade % g/t Grade % g/t

Zinc Lead Zinc Lead Silver Zinc Lead Silver

Rampura Agucha 20.99 14.67 1.92 23.66 11.8 1.92 53 70 14.28 1.96 66

Rajpura Dariba 7.87 7.3 2.21 32.47 7.76 2.13 87 9.1 6.8 1.77 78

Sindesar Khurda 17.06 5.67 3.68 40.78 4.9 3.05 161 10 4.93 2.78 158

Bamnia Kalan 1.69 5.29 1.84 3.37 5 3.8 114 - - - -

Zawar 25.26 5 1.8 32.73 4.9 2.61 51 7.9 3.66 2.03 36

Kayar 6.27 10.83 1.53 4.31 9.8 1.78 36 - - - -

Total 79.14 8.41 2.26 137 6.92 2.51 94 97 11.74 2.03 74


Proved & Probable InferredMeasured & Indicated

Resources

mt mt

Name of the mines

mt

725

410

400

394

390

382

264

240

209

200

0 200 400 600 800

Rampura …

Red Dog

Gamsberg

Mehdiabad

Mount Isa

Selwyn

Ozernoe

Lanping

Penasquito

McArthur River

Production(in kt) 2020E

Source:Presentation,May 2010,R K Global Reseach

0

100

200

300

400

500

600

700

FY07 FY08 FY09 FY11

77 80 89 96.7

133 152 183 216.5

210232

272313.2

mn

to

nn

es

Reserves Resources Total

Source:Company, R K Global Reseach



Strong reported Balance Sheet

HZL has consistently generated strong cash flow which helped it to fund its capex plan from its internal accrual

without raising debts. The company liquid and invested cash reserves in FY10 stood at `119000mn which include

`110000mn in debt mutual fund and `9000mn as a fixed deposit in bank. However the cash reserve has increased by

25% in FY11 to `149650mn with `93320 in mutual funds and `55550mn in FD. Total cash balance of the company is

expected to increase at CAGR of ~7.4% to `65034mn in FY13E from `56329mn in FY11. We expect that the operating

cash flow of the company will further improve and will grow at CAGR of ~24% by FY13 to `73624mn from `47763mn

in FY11 with the reduction in the interest cost on debt which stood at `439mn in FY10, came down by ~55% in FY11

to `194 as the company debt almost reduced to zero level in FY11.

Other income surge by 35% and tax reduction by 1% will enhance profitability. HZL has generated strong revenue from other income of `9889mn in FY11 from `7222mn in FY10 increase of 35%

compared to last year due to the increase in the return

on investments from 5% to 6% and profit booking

from investment base. We are quite confident that the

company will increase its investment at a CAGR rate of

34% in FY13 to `168395mn from `93345mn in FY11

which will add towards the revenue growth of the

company. Additionally, the tax rate of the company for

current year also got reduced to 13.75% in FY11 from

16.60% in FY10 due to the tax optimization initiatives

towards the company and 28% refundable against

MAT Credit Entitlement. Thus overall cost to company

is got dented which is good for long term growth of the

company.

Sales to be strong, Margins to remain elevated

1158

989033.96%

17.77%

0%

5%

10%

15%

20%

25%

30%

35%

40%

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2000

4000

6000

8000

10000

12000


`m

n

Other Income Tax Rate


0

100

200

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2010 2011 2012E 2013E

Debt


5000

15000

25000

35000

45000

55000

65000

75000

85000

2010 2011 2012E 2013E

`M

n

Cash

10.51 10.40

6.46

11.60

13.86

16.04

0

2

4

6

8

10

12

14

16

18

0

20000

40000

60000

80000

100000

120000

140000

FY 08 FY 09 FY 10 FY 11 FY 12E FY 13E

`/

Sh

are

`M

n

Sales EPS




It is expected that the company profitability will be enhanced on the back of increased operational front and cost

reduction in terms of interest and other expenses. With cost reduction measures, along with the enhanced capacity

utilization rate from 73% by producing 775Kt in FY11 to nearly 87% by volume production of 1065Kt by FY13E on

the back of high R&R which is expected to led revenue growth at CAGR of 13.7% to `135751mn in FY13 from

`104898mn in FY11. HZL has maintained average PBITDM of ~54% from last 3 years to FY11 and we expect that this

trend will continue in the coming years on the back of better operational performance coupled with the rising metal

prices will help company to maintain its PATM and PBIDTM at 54% and 63% respectively in next two years. With the

profitability increased, we expect that the EPS of the company will also move up to ` ~14 per share and ` ~16 per

share in FY12E and FY13E. *(EPS is considered after stock split and bonus issue which brought down the face value to

`2 and increase the share capital to `8450 mn)

Realization is expected to grow with voluminous growth

During Q4 and FY 2011, the company has achieved its highest ever mined metal production of 231,000 tons and

840,000 tons, up 19% and 9% respectively, compared with the corresponding prior periods due to the higher

contribution from Rampura Agucha and Sindesar Khurd mines. Refined Zinc metal production, during Q4 and FY

2011, was highest ever at 194Kt and 712Kt up 29% and 23% respectively compared with the corresponding prior

periods due to the increase contribution from Dariba Hydro Zinc. With the voluminous growth we expect that the

realization of the company will grow at a steady rate although not at the same pace due to the incessant cost pressure

and increased volume. We expect Zinc production will grow at CAGR rate of 18% by producing 1065Kt in FY13 from

775Kt in FY11 and the realization will grow to `127per Kt in FY13E.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000


`m

in

PBIDT PAT PBIDTM% PATM%


100

131 135

120127

0

20

40

60

80

100

120

140

160

0

200

400

600

800

1000

1200

2009 2010 2011 2012E 2013E

`/

kg

in k

t

Volumes Realization

Sourec:Company,R K Global Research



Anglo assets to add value for HZL business Anglo American acquisition at $1601mn by the parent company Sterlite industries will prove to be profitable business

for HZL as the Anglo American assets has R&R of 202mn tons which will be supportive for HZL as the company

utilization rate is expected to mop up at an average rate of more than 80% by FY13E compared to 73% in FY11. We

expect HZL revenue will grow at CAGR of ~16% during FY11-13 period while its margin is expected to hover around

58%-60% during the same period.

Zinc market to remain strong with steel major demand. Indian steel industry has grown sharply on the back of rapid

progress on strong fundamentals over the years. Also the

government has taken various industrial reforms and has

planned to invest `214000crs (23% increased) for infra space in

FY11-12 budget. Crude steel production has grown at CAGR of

6.4% in 2010 to 66.8mmt and it is expected that the production

will grow at CAGR of 10% during 2010-13. Hence with the

growth in steel demand the market of the zinc will also be strong

in FY12. The major users of Zinc are in galvanizing, die casting,

chemicals, others, alloys, brass bronze. Steel industry basically

uses 47% of zinc for coating steel in order to avoid rust. With

demand to grow at 10% along with the government proactive

incentive plans to boost economic growth by injecting funds in

various industries, such as construction, infrastructure,

automobile, and power will drive the steel industry in future.

Steel major, Tata Steel executive is also positive for the steel

demand in Asia and expect 9% growth annually. With the growth of the steel demand we feel that the zinc market will

remain strengthen in the FY12 and FY13 as it is expected that the per capita consumption of steel will move up in near

term.

Location Mine Ownership R &R (Mnt) R&R Grade Production 2009

Zn % Pb % Zn (Kt) Pb(Kt)

Namibia Skorpion Mine 100% 8.3 11.30% NIL 150Kt NIL Gergarub Agmnt with Rosh Pinah NIL NIL NIL NIL NIL

S.A Black Mountain Mine 74% 51.7 1.50% 2.90% 21Kt 36Kt Gamsberg 74% 137.6 6.90% 0.40% NIL NIL

Ireland Lisheen Mine 100% 8.7 11.90% 1.90% 172Kt 19Kt

19%

47%

8%

9%

3%14%

Zinc end uses

Brss/Bronze

Galvanising

Die Casting

Chemicals

Others

Alloys

Sourec:Company,R K Global Research

4461

90

135

200

20

40

60

80

100

120

140

160

180

200

220

2012 2020 2030 2040 2050

Kg

Per Capita Consumption of finished steel



Key Risk to Investment Political, Economical and Regulatory Risk: HZL’s profitability depends greatly on government trade and royalty

policy. For instance, if export duties or royalties for zinc are hiked, or the government discontinues technical

assistance, the company's top-line could suffer. Furthermore, if the company fails to extend mining leases due to

expire in FY 2010; production at a number of its mines will be brought to a standstill, posing a downside risk to our

rating.

Excessive dependent on Rampura Agucha for production: Rampura Agucha has the longest mine life (20 years)

and the largest reserves in the company's portfolio. Its other sites have an average mine life of just 10-12 years. This

leaves the company particularly dependent on high grades achieved at Rampura Agucha, especially after other sites

have been depleted. If grades at this site deteriorate, there would be a downside risk to our rating as the company's

zinc production would likely fall short of our expectations.

Delivery of expansion project on time and within the budget: The Company has many undergoing Greenfield and

the brown field projects in their hand completion of which is highly dependent on the regulatory approval, renewals

of approvals, human resource constraints, technical issues, civil or other unforeseen reasons. So any delay in such

requirement, will impact the company as a whole. It is expected that the company is facing some inflationary pressure

from civil side at Utkal project, if delayed will additionally cost 600cr to the company. Thus it will impact the company

as whole as well as our rating.

Commodity and Currency risk: HZL business includes Zinc and Lead which are priced with reference to LME prices

which in turn is highly influenced by global demand and supply impacted by the economic scenario, infrastructure

spending and speculative activities. Our calculation for revenue is based on forward prices of LME and exchange rates

and their correlation with the revenue. Hence any changes from that assumption will change our valuation

Destruction in demand driver: HZL's products are mainly used in the steel industry, which is suffering from the

global economic slowdown. Many major steel companies have announced the production cuts globally and in India.

Continued weak demand for steel, will affect the demand for zinc.

Taxes and Royalties: Mining companies in India are liable to pay several taxes and duties. Currently, HZL pays

royalty of around 8.4%, 12.7% and 7.2% in zinc, lead and silver respectively. Hence any hike in these rates would

have a negative impact on the margins and thereby, on the profitability of the company.

Outlook & Valuation At current market price of `121.95, the stock is trading at EV/EBITDA of ~5.5x of its FY13E, EBITDA of `79732mn.

We believe that the stock deserve premium as the company is largest producer of zinc and expected to gain from its

silver business. We expect to see upside in the coming years with its strong fundamentals and zero debt with

substantial cash reserves on its books. We initiate a “BUY” rating on the HZL stock with target price of ` 159, an

upside potential of ~30%, using EV/EBITDA of 6.5x FY13E.

EV/EBITDA valuation table

(`Mn)

FY13E EBITDA 91179

Exp EV/EBITDA (x) 6.5

Expected EV 592667

Market Cap Expected 672362

No of Share (mn) 4225

Fair Value (`) 159



Financial Highlight (` Mln)

Income Statement FY10 FY11 FY12E FY13E Balance Sheet FY10 FY11 FY12E FY13E

Net Sales 80170 99121 110122 125488 Liabilities

Total Expenditure 33469 44262 40926 45756 Share Capital and Warrants 4225 8451 8451 8451

Operating Profit (Excl OI) 46701 54859 69196 79733 Shareholder's Funds 181240 225332 269832 321523

Other Income 7222 9890 11251 11447 Total Debts 605 4 402 358

Operating Profit 53923 64749 80446 91179 Total Liabilities 181844 225336 270234 321881

Interest 439 194 178 153 Assets

PBDT 53484 64555 80268 91027 Gross Block 82407 98023 100684 118081

Depreciation 3343 4747 4450 5209 Less: Accumulates Dep. 20766 25481 29931 35140

Profit Before Tax 50141 59596 75819 85818 Net Block 61641 72542 70754 82941

Provision for Tax 9727 10591 17237 18062 Capital Work in Progress 11130 8752 14594 17879

Profit After Tax 40414 49005 58581 67756 Investments 109492 93346 113276 146526

Cash and Bank 9275 56329 75354 80053

Ratios FY10 FY11 FY12E FY13E Total Current Assets 19953 75889 93097 99170

Per Share Less: Current Liabilities 13258 15747 12026 13908

Earnings Per Share (Rs) 6.46 11.60 13.86 16.04 Net Current Assets 6695 60143 81071 85262

CEPS(Rs) 10.36 12.72 14.92 17.27 DTA/L -7112 -9447 -9460 -10727

Book Value (Rs) 42.89 53.33 63.86 76.09 Total Assets 181844 225336 270234 321881

Dividend Pay Out Ratio 0.12 0.08 0.09 0.10

Margin Ratios Cash Flow Statement FY10 FY11 FY12E FY13E

PBIDTM (%) 58% 55% 63% 64% Cash Flow from Operating Activities

OPM% 67% 65% 73% 73% EBDIT 53923 64749 80446 91179

EBITM (%) 67% 65% 73% 73% Changes in CA (Ex. Cash) -30 -8883 1818 -1374

Pre Tax Margin(%) 63% 60% 69% 68% Changes in CL 3249 2489 -3721 1882

PATM (%) 50% 49% 53% 54% Changes In WC 3219 -6394 -1903 508

Performance Ratios Cash fro Operation 57142 58354 78543 91687

ROA (%) 21% 20% 21% 20% Direct Taxes Paid 9727 10591 17237 18062

ROE (%) 23% 23% 22% 22% Net Cash From Operation 47415 47764 61306 73625

ROCE (%) 30% 29% 29% 28% Cash Flow from Investing Activities

Sales/Fixed Asset(x) 1.10 1.22 1.29 1.24 Capital Expenditure (CAPEX)

-23897 -13239 -8503 -20682

Working Capital/Sales(x) 0.08 0.61 0.74 0.68 Investments -40203 16146 -19930 -33250

Growth Ratio Net Cash From Investing -64100 2906 -28433 -53931

Net Sales Growth(%) 41% 24% 11% 14% Cash Flow from Financing Activities

Core EBITDA Growth(%) 71% 17% 26% 15% Change in Debt 518 -601 398 -45

EBIT Growth(%) 77% 16% 29% 15% Change in Equity 0 4225 0 0

PAT Growth(%) 48% 21% 20% 16% Interest Paid -439 -194 -178 -153

EPS Growth(%) -38% 80% 20% 16% Dividends Paid -4911 -4049 -5236 -6808

Financial Stability Ratios

Others 2078 -5121 0 0

Total Debt/Equity(x) 0.00 0.00 0.00 0.00 DTL & Misc Expenditues 1524 2335 13 1266

Current Ratio(x) 3.78 1.50 4.82 7.74 Net Cash From Financing -1231 -3616 -13847 -14995

Interest Cover(x) 115.16 309.28 427.60 563.48 Net Increase in Cash -17916 47054 19025 4698

Cash at the End 9275 56329 75354 80053



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Rating Criteria BUY Stock to generate return above 15% from CMP over the next 12 months period HOLD Stock to generate return between 0-15% from CMP over the next 12 months period SELL Stock to generate less than 0% from CMP over the next 12 months period

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