4QFY2012 Result Update | Base Metals

April 19, 2012

Hindustan Zinc
Performance Highlights

ACCUMULATE
CMP Target Price
% chg (yoy) (3.2) (15.7) (794)bp (19.8) 3QFY12 2,747 1,402 51.1 1,280 % chg (qoq) 12.6 18.3 258bp 11.0

`126 `139
12 months

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Adjusted PAT

4QFY12 3,094 1,659 .6 1,421

4QFY11 3,197 1,969 61.6 1,771

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Base Metals 53,260 1.1 155/107 112,879 2 17,504 5,332 HZNC.BO HZ@IN

Source: Company, Angel Research

Hindustan Zincs (HZL) 4QFY2012 results were slightly ahead of our expectations. Net sales decreased by 3.2% yoy and EBITDA margin slipped by 794bp yoy, mainly due to lower realizations of zinc and lead. We recommend Accumulate on the stock. Top line decreases by 3.2% yoy: For 4QFY2012, HZLs net sales decreased by 3.2% yoy to `3,094cr (slightly above our estimate of `2,919cr) mainly on account of a decline in realizations of zinc and lead. Lower realizations and higher costs dent EBITDA margin: Cost of production of zinc increased by 17.0% yoy to `41,693/tonne during the quarter. Hence, HZLs EBITDA margin contracted by 794bp yoy to 53.6% and EBITDA decreased by 15.7% yoy to `1,659cr. Other income was higher by 26.0% yoy to `381cr. Thus, adjusted PAT decreased by 19.8% yoy to `1,421cr. Expansion projects remain on track: HZLs underground mine development work at Rampura Agucha mine and greenfield Kayar mine development are on schedule. The company expects production to increase to 2mn tonnes at its Sindesar Khurd mine. The company also expects overall silver production to increase to 350 tonnes in FY2013. Outlook and valuation: Despite a decline in zinc prices over the past one year, we expect HZLs net profit to grow by 12.3% and 11.9% yoy in FY2012 and FY2013, respectively, on the back of higher sales volumes of lead and silver. At the CMP, the stock is trading at inexpensive valuation of 4.5x and 3.3x FY2013E and FY2014 EV/EBITDA, respectively. Hence, we recommend Accumulate on the stock with a target price of `139. Key financials
Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 64.9 1.8 1.4 32.0

Abs. (%) Sensex Hindustan Zinc

3m 6.4 2.8

1yr (10.1)

3yr 59.4

(14.5) 153.1

FY2011 9,912 23.6 4,922 21.8 11.6 55.3 10.9 2.4 24.1 24.2 3.9 7.0

FY2012E 11,255 13.5 5,569 13.2 13.1 52.6 9.6 2.0 22.4 21.3 3.1 5.8

FY2013E 13,043 15.9 6,257 12.3 14.8 51.8 8.5 1.7 21.2 20.5 2.4 4.5

FY2014E 14,222 9.0 6,999 11.9 16.6 52.8 7.6 1.4 19.9 19.5 1.7 3.3

Bhavesh Chauhan
Tel: 022- 39357800 Ext: 6821 Bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

Hindustan Zinc | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 performance

(` cr) Net sales Mining and mfg. expenses % of Net sales Mining royalty % of Net sales Staff cost % of Net sales Admin and selling % of Net sales Total expenditure % of Net sales Operating income EBITDA % margin Interest Depreciation Other income Exceptional items Profit before tax % of Net sales Provision for tax % of PBT Profit after tax % of Net sales Adjusted net profit
Source: Company, Angel Research

4QFY12 3,094 973 31.5 229 7.4 144 4.7 129 4.2 1,476 47.7 41.5 1,659 53.6 2 167 381 8 1,862 60.2 449 24.1 1,413 45.7 1,421

4QFY11 3,197 771 24.1 251 7.9 134 4.2 113 3.5 1,269 39.7 40.3 1,969 61.6 13 127 302 2,131 66.6 359 16.9 1,771 55.4 1,771

yoy % (3.2) 26.3 (8.7) 7.7 14.3 16.3 2.9 (15.7)

3QFY12 2,747 986 35.9 201 7.3 134 4.9 65 2.4 1,385 50.4 40.0 1,402 51.1 9

qoq % 12.6 (1.2) 14.3 8.1 99.6 6.6 3.6 18.3 (72.4) 5.0 (0.2) 15.7 33.6 10.9 11.0

31.5 26.0 (12.6) 25.0 (20.2) (19.8)

159 382 6 1,610 58.6 336 20.9 1,274 46.4 1,280

Exhibit 2: 4QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA EBITDA margin (%) Adj. PAT
Source: Company, Angel Research

Actual 3,094 1,659 53.6 1,421

Estimates 2,919 1,472 50.5 1,335

chg (%) 6.0 12.7 318bp 6.5

Lower realizations lead to a decline in top line

For 4QFY2012, HZLs net sales decreased by 3.2% yoy to `3,094cr (slightly above our estimate of `2,919cr) mainly on account of a decline in realizations of zinc and lead. Average LME spot zinc prices were lower by 15.3% yoy to US$2,028/tonne during 4QFY2012. Zinc and lead production volumes (combined) declined by 2.0% yoy to 223kt, while silver production grew by 77.0% yoy to 88kt during the quarter.

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Exhibit 3: Net sales decreased by 3.2% yoy

3,500 3,000 2,500 130 110 90

(` cr)

2,000 1,500 1,000 500 0 4QFY09 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 Net sales yoy growth - RHS

50 30 10 (10)

Source: Company, Angel Research

EBITDA margin contracts by 794bp yoy

Cost of production of zinc increased by 17.0% yoy to `41,693/tonne during the quarter. Hence, HZLs EBITDA margin contracted by 794bp yoy to 53.6% and EBITDA decreased by 15.7% yoy to `1,659cr. Other income was higher by 26.0% yoy to `381cr. Thus, net profit decreased by 20.2% yoy to `1,413cr. Excluding exceptional items (`8cr in 4QFY2012 and nil in 4QFY2011), adjusted net profit declined by 19.8% yoy to `1,421cr (above our estimate of `1,335cr).

Exhibit 4: EBITDA and EBITDA margin trend

2,100 1,800 1,500 60 80

Exhibit 5: Net profit and net profit margin trend

2,100 1,800 1,500 60 50 40 30 20 10 0 4QFY09 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 Net profit (LHS) Net profit margins (RHS)

(` cr)

(` cr)

(%)

900 600 300 0 4QFY09 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12 EBITDA (LHS) EBITDA margins (RHS)

40

900 600 300

20

Source: Company, Angel Research

Source: Company, Angel Research

Expansion projects
HZLs underground mine development work at Rampura Agucha mine and greenfield Kayar mine development are on schedule. The company expects production to increase to 2mn tonnes at its Sindesar Khurd mine. The company also expects overall silver production to increase to 350 tonnes in FY2013. Moreover, given the cash-rich balance sheet, HZL is actively exploring greenfield projects through 20 prospecting licenses and four mining lease projects across different states.

April 19, 2012

(%)

1,200

1,200

(%)

70

Hindustan Zinc | 4QFY2012 Result Update

Investment arguments
Mining in Kayar could be the next phase of growth
Since the expansion at Sindesur Khurd is complete, HZL has commenced work at its underground Kayar mine, which has 11mn tonnes of high-grade reserves (10-12% zinc content). The company aims to mine 1mn tonnes per year, once it is fully operational. Moreover, given the cash-rich balance sheet, HZL is actively exploring greenfield projects through 20 prospecting licenses and four mining lease projects across different states.

Current zinc prices near marginal cost of production

At current levels of ~US$2,000/tonne, zinc prices stand near the marginal cost of production for several zinc producers. Hence, we believe probability of a further decline in zinc prices from these levels remains lower. Further, over the next 3-5 years, several zinc mines are expected to be exhausted; hence, production is likely to suffer. This should support zinc prices over the medium term in our view.

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Valuation
Despite the decline in zinc prices, we expect HZLs net profit to grow by 12.3% and 11.9% yoy in FY2012 and FY2013, respectively, on the back of higher sales volumes of lead and silver. Furthermore, the companys balance sheet remains strong with cash and equivalents at `17,948cr as of March 31, 2012 (34% of HZLs current market cap). At the CMP, the stock is trading at inexpensive valuation of 4.5x and 3.3x FY2013E and FY2014 EV/EBITDA, respectively. Hence, we recommend Accumulate on the stock with a target price of `139.

Exhibit 6: Key assumptions

LME prices (US$/tonne) Zinc Lead Silver (`/kg) Sales volume (tonnes) Zinc metal Lead metal Silver Source: Angel Research FY2013E FY2014E

2,120 2,176 50,000

2,150 2,206 50,000

830,655 141,855 320,000

872,188 159,587 430,000

Exhibit 7: EPS Angel forecast vs. consensus

Year (%) FY2013E FY2014E
Source: Bloomberg, Angel Research

Angel forecast
14.8 16.6

Bloomberg consensus
14.7 16.4

Variation (%)
0.7 1.0

Exhibit 8: EV/EBITDA band

70,000 60,000 50,000
(` cr)

40,000 30,000 20,000 10,000 0

Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

2x
Source: Bloomberg, Angel Research

4x

6x

8x

10x

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Hindustan Zinc | 4QFY2012 Result Update

Exhibit 9: P/E band

250 200 150
(`)

100 50 0
Dec-06 Aug-04 Aug-11 Aug-11 Apr-09 Jul-07 Mar-05 May-06 Nov-09 Mar-12 Oct-05 Feb-08 Sep-08 Jan-04 Jun-10 Jan-11 Jan-11

2.0x
Source: Bloomberg, Angel Research

6.0x

10.0x

14.0x

Exhibit 10: P/BV band

400 350 300 250
(`)

200 150 100 50 0

Oct-05 Feb-08 Sep-08 May-06 Nov-09 Dec-06 Jan-04 Aug-04 Mar-05 Apr-09 Jun-10 Jul-07 Mar-12

0.5x
Source: Bloomberg, Angel Research

2.0x

3.5x

5.0x

Exhibit 11: Recommendation summary

Company Hindalco Nalco Sterlite HZL CMP Target Price (`) 128 59 110 126 (`) Reco. Mcap Upside (` cr) (%) 6 (13) 25 9.9 P/E (x) 8.5 23.4 6.1 8.5 7.4 16.9 6.1 7.6 P/BV (x) 0.7 1.3 0.7 1.7 0.7 1.2 0.6 1.4 EV/EBITDA (x) 5.4 10.9 2.9 4.5 5.1 8.4 2.5 3.3 RoE (%) 8.7 5.6 12.5 21.2 9.2 7.4 11.9 19.9 RoCE (%) 6.7 3.2 11.3 20.5 7.2 5.6 10.8 19.5 FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

136 Accum. 24,534 51 Reduce 15,270 137 Buy 36,990 139 Accum. 53,260

Source: Company, Angel Research

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Profit & loss statement

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other Mfg. costs Personnel Other EBITDA % chg % EBITDA margin Depreciation EBIT % chg (% of Net sales) Interest & other charges Other income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary inc/(expense) PBT (reported) Tax (% of PBT) PAT (reported) Adj. net income % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 5,680 5,680 (27.9) 2,946 1,906 364 365 311 2,734 (49.2) 48.1 285 2,449 (52.5) 43.1 22 931 27.7 3,358 (43.9) 3,358 631 18.8 2,728 2,728 (38.0) 48.0 6.5 6.5 (38.0) FY2010 8,017 122 8,139 43.3 3,347 1,961 613 457 316 4,792 75.3 58.3 334 4,458 82.0 55.6 44 600 12.0 5,014 49.3 5,014 973 19.4 4,041 4,041 48.2 49.7 9.6 9.6 48.2 FY2011 9,912 127 10,039 23.3 4,431 2,759 803 511 358 5,608 17.0 55.3 475 5,133 15.1 51.8 18 866 14.5 5,981 19.3 21.2 5,960 1,059 17.8 4,900 4,922 21.8 49.0 11.6 11.6 21.3 FY2012 FY2013E FY2014E 11,255 150 11,405 13.6 5,336 3,543 838 535 421 6,069 8.2 52.6 611 5,459 6.3 48.5 14 1,543 22.1 6,988 16.8 43.1 6,945 1,419 20.4 5,526 5,569 13.2 48.8 13.1 13.1 12.8 13,043 173 13,215 15.9 6,287 4,108 1,056 639 483 6,929 14.2 51.8 691 6,237 14.3 47.8 13 1,696 21.4 7,920 13.3 7,920 1,663 21.0 6,257 6,257 12.3 47.3 14.8 14.8 13.2 14,222 199 14,421 9.1 6,713 4,366 1,152 683 512 7,708 11.2 52.8 683 7,025 12.6 49.4 14 1,849 20.9 1.0 8,860 11.9 8,860 1,861 21.0 6,999 6,999 11.9 48.5 16.6 16.6 11.9

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-Progress Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Total assets 5,856 1,751 4,105 1,108 6,929 3,784 2,719 313 751 1,001 2,783 14,925 8,241 2,077 6,164 1,113 10,949 1,995 928 457 611 1,326 669 18,896 9,802 2,548 7,254 875 9,335 7,589 5,633 752 1,204 1,575 6,014 23,478 11,802 3,159 8,644 575 9,335 11,644 9,495 752 1,397 2,380 9,264 27,818 14,002 3,850 10,152 275 9,335 15,610 13,258 752 1,600 2,286 13,324 33,086 15,002 4,533 10,470 25 9,335 21,600 19,149 752 1,699 2,333 19,267 39,097 423 13,935 14,358 9 559 14,925 423 17,701 18,124 60 711 18,896 845 21,688 22,533 0.4 945 23,478 845 26,028 26,873 0.4 945 27,818 845 31,296 32,141 0.4 945 33,086 845 37,307 38,152 0.4 945 39,097 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

Note: Cash and Bank balance include fixed deposits

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Cash flow statement

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in net fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and adv. Other income Cash flow from investing Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal. FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E 3,358 286 296 (777) 521 2,642 5,014 335 173 (563) 785 4,173 5,960 475 (239) (835) 1,116 4,244 1,870 28 6,945 611 612 1,419 6,749 (1,700) (1,700) 1,186 (1,186) 3,862 5,633 9,495 7,920 691 (296) 1,663 6,652 (1,900) (1,900) 989 (989) 3,763 9,495 13,258 8,860 683 (52) 1,861 7,630 (750) (750) 989 (989) 5,891 13,258 19,149

(1,374) (2,247) (1,446) (443) (3,922) 71 (1,602) 8 124 22 (137) (844) 3,563 2,719 (96)

2,288 (4,082) 43 198 33 (187) 8 919 928 (60) 296 8 (363) 250 5,383 5,633

(3,348) (3,977) (3,631)

April 19, 2012

Hindustan Zinc | 4QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage (0.7) (3.5) 111.9 (0.7) (2.5) 101.5 (0.7) (2.7) 280.8 (0.7) (3.1) 391.3 (0.7) (3.3) 478.2 (0.7) (3.7) 494.0 1.0 68 11 46 30 1.1 49 7 52 11 1.1 63 8 39 11 1.0 63 8 40 17 1.0 63 8 40 18 1.0 63 8 40 18 18.0 58.9 20.8 26.4 88.5 24.9 24.2 75.8 24.1 21.3 68.0 22.4 20.5 67.0 21.2 19.5 67.5 19.9 43.1 81.2 1.1 40.2 40.2 55.6 80.6 1.3 59.3 59.3 51.8 82.2 1.3 55.0 55.0 48.5 79.6 1.3 50.3 50.3 47.8 79.0 1.4 51.3 51.3 49.4 79.0 1.4 53.3 53.3 6.5 6.5 7.1 4.0 34.0 9.6 9.6 10.4 6.0 42.9 11.6 11.6 12.8 0.7 53.3 13.1 13.1 14.6 2.4 63.6 14.8 14.8 16.4 2.0 76.1 16.6 16.6 18.2 2.0 90.3 19.5 17.7 3.7 3.2 7.7 16.0 2.9 13.2 12.2 2.9 4.8 5.2 8.9 2.2 10.9 9.9 2.4 0.6 3.9 7.0 1.6 9.6 8.6 2.0 1.9 3.1 5.8 1.2 8.5 7.7 1.7 1.6 2.4 4.5 0.9 7.6 6.9 1.4 1.6 1.7 3.3 0.6 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

April 19, 2012

10

Hindustan Zinc | 4QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Hindustan Zinc No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) :

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 19, 2012

11