Faster-than-expected ramp-up in zinc & aluminum segment are key upside risks while higher-than-expected capex and weak commodity prices are key downside risks, Morgan Stanley said.
Hindustan Zinc shares dropped 4 percent intraday Tuesday to hit a fresh 52-week low of Rs 257 as analysts slashed price target for the stock after a decline in Q3 earnings.
The stock was quoting at Rs 257.85, down Rs 10.30, or 3.84 percent on the BSE at 10:47 hours IST.
Axis Capital maintained hold rating for the stock but reduced price target to Rs 278 from Rs 300 earlier after cut in FY19/20/21 EPS estimates to Rs 20/23/26 due to increase in cost base.
ICICI Securities also retained hold call but slashed price target to Rs 259 from Rs 273 earlier.
"We have reduced volumes estimates for FY20 to reflect small delays in expansion projects. This leads to lower zinc volumes (11 percent) and slightly lower EBITDA per tonne," the research house said.
ICICI has moderated its FY19E earnings to reflect 9MFY19 performance and capex for FY19 to $350 million from $400-450 million.
Numbers for the December quarter were more or less in line with estimates. Company's profit for the quarter declined 3.8 percent year-on-year to Rs 2,211 crore and revenue dipped 6.5 percent to Rs 5,540 crore.
Cost of production (CoP) of zinc in Q3FY19 improved by 4 percent QoQ and 3 percent YoY to $997 per tonne, mainly due to higher volumes, operational efficiencies and lower diesel costs partly offset by higher mine development expense. "The yearly fall was mainly on account of higher acid credits."
The CoP is expected to be fall further going forward, with increasing usage of linkage coal and ramping up of Rampura Agucha mines, ICICI Securities said.
At operating level, company's EBITDA (earnings before interest, tax, depreciation and amortisation) was down 12.5 percent at Rs 2,838 crore and margin contracted to 51.2 percent against 54.8 percent in Q3FY18.
"Q3 core EBITDA was in-line with estimates," said Morgan Stanley which has equalweight rating on the stock with a target price at Rs 235, implying 12 percent downside from January 21 levels.
The global brokerage said management's reiteration of guidance implies robust volume growth of 6-7 percent in Q4.
Faster-than-expected ramp-up in zinc & aluminum segment are key upside risks while higher-than-expected capex and weak commodity prices are key downside risks, Morgan Stanley said.
Hindustan Zinc's management expects underground mine production to increase progressively every quarter. "Mined metal production in FY19 expected to be slightly higher than FY18. Silver production guidance remains unchanged at 650-700ktpa while refined production of zinc and lead combined is expected to be in sync with mined metal and slightly in short of FY18 production."
Management's guidance of FY19 CoP before royalty is unchanged at $950-975 per tonne. As per the management, CoP has already peaked and is on a declining trend. Company has got additional coal linkage in Jan’19, which should increase linkage proportion to at least 15-20 percent from 3 percent earlier.
ICICI Securities said with Q3FY19 costs at around $997 per tonne, the CoP guidance seems a tall ask, but management expects higher volumes as well as lower coal and fuel costs to help achieve the target. "Management was categorical in its assessment of not engaging in any hedging activities."
Meanwhile, there has been a change in management team with Amitabh Gupta, CFO for past seven years, being elevated to another role in the company and Swayam Saurabh joining as deputy CFO (acting CFO).
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