Zinc of Health

POUNDWISE

The outlook on Hindustan Zinc is positive, but investors need to be cautious.

Prices of non-ferrous metals like copper and zinc have been touching new highs on the London Metal Exchange (LME) almost everyday. So it is no surprise to see the stock prices of manufacturers like Hindustan Zinc (HZL) and Sterlite Industries zooming.

In case of HZL, the stock gained about 44 per cent in the past week to Rs 753, outpacing group company Sterlite Industries' gain of 23 per cent. Since we last wrote on the company in The Smart Investor on October 10, 2005, the company has delivered a staggering return of 257 per cent.

After the sharp run-up in the stock price of HZL, the scope for further appreciation is questionable.

At present, the stock trades at a P/E of 17 times estimated FY08 EPS. Pritesh Vinay, metals analyst at Edelweiss Capital says, "The outlook for the company is still positive but going forward, investors will need to have an investment horizon of at least a year and a half."

But this is not the consensus. Another analyst who does not wish to be quoted, says, "If the zinc prices remain at around $ 2500 per tonne in FY07 and FY08, then the current levels and valuations are justifiable. However, if they settle to around $ 2000 per tonne by FY08, then the stock is richly valued."

Zinc prices touched an all-time high of $ 2,918 on April 10, 2006 for the first time ever on the LME and they have more than doubled in the past year as the demand is expected to outstrip supply for the next 3-4 years.

Zinc is used for galvanising steel, mainly in the construction and automobile industry castings, both of which are on an exponential boom. Hindustan Zinc is the only major integrated zinc player in India with a 3.9 lakh tonne capacity. It has its own zinc ore, which makes it immune from the slack raw material supply faced by other players globally.

Thus, it is one of the lowest cost producers. With the rising global demand, it has embarked on expansion plans to scale up production to 10 lakh tonnes in the next four years.

To align with international prices, the company has raised its zinc prices 13 times so far this year. Analysts expect more hikes if global prices continue to rise.