Investment Focus - Hindustan Zinc: Buy bl-premium-article-image

Adarsh GopalakrishnanBL Research Bureau Updated - November 15, 2017 at 12:12 PM.

ColHinzin.eps

Investors with a long-term view can pick up shares in Hindustan Zinc. The company is among the largest domestic producers of zinc, lead and silver. Growing capacity and demand for galvanised steel products and favourable economics of primary lead smelters over recyclers will provide the company with plenty of growth potential over the next five years. At 9.6 times FY12 earnings, the company's price earnings multiple is lower than global peers such as Nyrstar and Xstrata. With one of the lowest conversion costs for zinc and lead; and high margins, Hindustan Zinc is a good option in the metals space.

Both lead and zinc consumption have grown at a compounded pace of 13 per cent and 15 per cent respectively between 2007 and 2011. Working in favour of Hindustan Zinc are two trends. Increasing consumption of galvanised steel (sheet coated by zinc) by flat steel producers and for construction points to strong zinc demand. Flat steel producers are expected to add over 10 million tonnes of capacity in the next two years. Galvanised steel consumption is expected to increase 30 per cent in the next two years. With over 90 per cent market share in the refined zinc space, Hindustan Zinc is expected to be a beneficiary of both of the above trends.

The quarter ended March 2012 saw Hindustan Zinc's sales slip by 3.2 per cent to Rs 3000 crore, after a fall in lead and zinc realisations. The prices of both metals averaged 20 per cent and 15 per cent lower than in the same period a year ago. Reining in the potentially sharper dip in sales was the ramped-up output of lead and silver. Lower prices of lead and zinc during the quarter led operating profit margins to slip by eight percentage points to 52 per cent. Net profits dipped by 20 per cent to Rs 1,419 crore. Other income of Rs 380 (up 23 per cent) on cash and current investments of Rs 18,000 crore played a major role in stemming the dip in profits. The massive cash holding and current investments translate into Rs 42 per share.

While the International Lead and Zinc Study Group indicates a surplus in the zinc market over the next two years, zinc prices may not come under further pressure. Estimates indicate that it would take 25 per cent higher zinc prices to incentivise the opening of new mines and smelters in high-cost locations in Europe and China. With oversupply in check and zinc prices hovering at close to the cost of production, the downside in zinc prices appears limited. A very steep correction in prices can cause some producers to shut smelters, thus supporting prices.

Published on April 21, 2012 16:30