Besides better than expected results for the quarter ended September 2013, there are more triggers for Hindustan Zinc (HZL) to perform well in the coming months. Higher LME zinc prices and expected increase in volumes will drive the earnings in the second half of the year. Beside earnings growth, the Street also drives it comfort from valuations. Its stock is currently trading at about 3.6 times its FY15 estimated enterprise value to operating profits, which is lower compared to its global peers who are currently trading at 5.5 to 6.5 times. Additionally, the company is sitting on huge cash, which is almost 40% of the market capitalisation of the company. Excluding its cash and cash equivalent, the core business is valued at 3.3 times its FY13 earnings.
On top of that at current market price the stock is offering a 2% dividend yield. Market is also counting on the possible gains if the remaining government stake sale to Vedanta is concluded.
"Its main shareholder Vedanta’s general meeting is scheduled for 30 October, when Vedanta will seek shareholders’ approval for its planned acquisition of a 29.5% stake in HZL from the Government of India for a maximum sum of $3.48 billion, which equates to Rs 173 a share for HZL. We believe obtaining the approval will not be an issue, and that the pending stake sale could add share-price momentum for HZ," Deepak Poddar, who tracks the company at Daiwa Capital Markets, said in a note.
"With a significant portion (50%) of investments in the Fixed Maturity Plans (FMPs), which are primarily held till maturity, we expect a significant portion of this to normalize in 2H FY14," said Anuj Singla, who is tracking the company at Deutsche Bank.
That apart in the coming months the company is expected report better volumes.
"We remain positive on HZL’s operating performance over FY14-15 as we forecast its refined zinc sales volume to improve over this period, Though the company has lowered its FY14 mined metal output guidance to 950,000 tonne (from 1 million tonne), we remain optimistic of strong zinc sales volume of 9.2% annually over FY13-15E. Rupee depreciation and strong LME prices should support its earnings in second half of FY14," said Deepak Poddar.
The company has also said that it plans to increase the Zawar mine capacity (zinc and lead) from the current 1.5 million tonne to about 5 million tonne in the coming years, which will not only help in higher volumes but will also help in bringing down the mining cost. That apart, higher LME prices should drive the earnings in the coming months. The LME zinc prices are up almost 5% in the last month and expected to remain firm considering the supply shortage in the global markets.
On top of that at current market price the stock is offering a 2% dividend yield. Market is also counting on the possible gains if the remaining government stake sale to Vedanta is concluded.
"Its main shareholder Vedanta’s general meeting is scheduled for 30 October, when Vedanta will seek shareholders’ approval for its planned acquisition of a 29.5% stake in HZL from the Government of India for a maximum sum of $3.48 billion, which equates to Rs 173 a share for HZL. We believe obtaining the approval will not be an issue, and that the pending stake sale could add share-price momentum for HZ," Deepak Poddar, who tracks the company at Daiwa Capital Markets, said in a note.
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The Street has turned upbeat about the outlook of Hindustan Zinc after its results for the quarter ended September 2013. The company reported strong 25% growth in revenues, helped by 20% growth in zinc production and marginal improvement in overall realisations. This along with gains on the cost front led to 29% spurt in operating profits to Rs 1,844.7 crore. This is also a reason that the company reported 190 basis point improvements in operating margins. However, the adjusted net profit grew mere by 10% to Rs 1,701.4 crore as a result of 46% decline in the other income to Rs 305.6 crore. Other income was lower on account of mark to market losses on its bond portfolio as a result of higher yields. But analysts expect this to normalise.
"With a significant portion (50%) of investments in the Fixed Maturity Plans (FMPs), which are primarily held till maturity, we expect a significant portion of this to normalize in 2H FY14," said Anuj Singla, who is tracking the company at Deutsche Bank.
That apart in the coming months the company is expected report better volumes.
"We remain positive on HZL’s operating performance over FY14-15 as we forecast its refined zinc sales volume to improve over this period, Though the company has lowered its FY14 mined metal output guidance to 950,000 tonne (from 1 million tonne), we remain optimistic of strong zinc sales volume of 9.2% annually over FY13-15E. Rupee depreciation and strong LME prices should support its earnings in second half of FY14," said Deepak Poddar.
The company has also said that it plans to increase the Zawar mine capacity (zinc and lead) from the current 1.5 million tonne to about 5 million tonne in the coming years, which will not only help in higher volumes but will also help in bringing down the mining cost. That apart, higher LME prices should drive the earnings in the coming months. The LME zinc prices are up almost 5% in the last month and expected to remain firm considering the supply shortage in the global markets.