The Hindu Business Line : Hindustan Zinc: Buy

WELL-INTEGRATED value chain, strong operational and financial contours, robust demand coupled with firm pricing environment, competitive cost structure and relatively attractive valuations make the stock of Hindustan Zinc an attractive buy over the medium term.

Investors can take fresh exposure to the stock. At its current price of about Rs 205, it commands a price-to-earnings multiple of about ten times its likely FY-06 earnings. Compared to its global peers such as Zinifex (Australia) and Falconbridge (Canada), the valuations appear attractive.

Hindustan Zinc is the largest domestic integrated zinc producer with a presence across the entire value chain. The company recently completed expansion of mining, refining, smelting and captive power operations. Augmented capacities are likely to drive the volume growth of the zinc major.

Further, benefits of higher economies of scale are likely to translate into savings in operating costs.The pricing environment lends a great degree of comfort.

Tight supply of zinc concentrate — a raw material for producing zinc — in the near-to-medium term suggests a firm outlook for zinc prices, Zinc prices are likely to remain firm in the $1,200-1,300 per tonne range .

With 100 per cent of the concentrate requirements met from its captive sources, it is better positioned to absorb supply shock and a downturn in metal prices, if any.

Over 70 per cent of the demand for zinc is absorbed by the steel galvanising market. With domestic steel companies putting up fresh capacities, the company is well-poised to meet the incremental demand.

On the global front, the deficit of the metal is expected to continue over the next year or two, primarily driven by the consumption growth in China.

The company also produces lead, which is consumed mainly by the battery segment.

India, which is emerging as the preferred destination for sourcing auto components, is likely to witness higher demand for batteries.

With rising automobile production in the domestic market, the company is going to be the prime beneficiary.The company has been reporting strong financials over the past few years.

While earnings have grown by a CAGR (compound annual growth rate) of about 40 per cent in the last five years, operating margins have remained at a healthy 30 per cent.

The return on shareholders' funds has been impressive at about 37 per cent. With a relatively low level of debt and a comfortable cash flows from operations, Hindustan Zinc is well-placed to fund its expansion without widening its equity base. Riding on the twin benefits of higher prices and lower costs, the company's margins are likely to expand over the next few quarters.

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