Hindustan Zinc

Thanks to stimuli rolled out by the Government in 2008-09, industrial output statistics are improving every month. This augurs well for the steel and, in turn, zinc manufacturers. The growth in vehicles sales witnessed last year has helped the automobile battery-makers regain volumes, translating into increased demand for lead, a critical raw material for batteries.

Hindustan Zinc is a key beneficiary of the strong demand for zinc and lead. At Rs 1,216 and trailing 12 months earnings by 15 times, investors can consider buying this stock.

Business operations

Hindustan Zinc is a part of the Sterlite Group. After the recent capacity expansion, the company has zinc smelting capacity of 9,64,000 tonnes per annum (tpa) and lead smelting capacity of 85,000 tpa.

Hindustan Zinc is the second-largest integrated zinc and lead producer in the world and is the only integrated zinc manufacturer in India.

Due it its large scale of operations, Hindustan Zinc is also among the low-cost zinc and lead producers. While domestic sales contribute 65 per cent of the company's revenues, exports, mainly to China, account for the rest.

Zinc and lead

Zinc and lead contribute over 95 per cent of the company's revenues. Zinc is anti-corrosive and hence finds application in construction activities, infrastructure facilities, household appliances, automobiles, steel furniture, and so on.

Galvanisation (a metallurgical process where zinc is coated on steel or iron to prevent corrosion) accounts for 50 per cent of its usage. Over 80 per cent of India's demand for zinc is met by Hindustan Zinc.

Lead is the primary ingredient for automobile and industrial batteries. Over 88 per cent of the demand for lead comes from the batteries industry.

Since most battery-makers have their lead-extraction facilities, Hindustan Zinc's share in the domestic market is about 18 per cent. In addition to its principal products, the company also recovers silver, cadmium and sulphuric acid as by-products.

Demand outlook

Global steel consumption for 2010 is expected to increase by 12 per cent. In line with this, the International Lead and Zinc Study Group (ILZSG) also forecasts 12 per cent increase in zinc demand.

While global steel production between April 09 and February 10 was up by 24 per cent, domestic production is yet to catch up, mainly due to capacity constraints. Steel production in India during this period was up by 8.5 per cent. The demand forecast for lead is equally positive, and ILZSG has predicted an 8 per cent demand growth in 2010.

With a revival in infrastructure, construction and automobile sales, demand for both the metals may remain strong. Though Hindustan Zinc did not take much of production cuts during the commodity meltdown, many global zinc and lead miners suspended their operations during this period.

Therefore, unlike in the case of aluminium, which faced the problem of stock overhangs for a long time, zinc and lead saw a relatively quicker correction in their warehouse stocks in the London Metal Exchange (LME).

Decline in warehouse stocks at LME, coupled with the positive demand outlook, have helped the LME prices of zinc and lead move up by 35 per cent and 13 per cent respectively since October 2009.

Financially strong

Like most commodity players, Hindustan Zinc also saw its sales and net profits shrink by 28 and 38 per cent respectively during the downturn period of FY-09. However, the company's financials have seen quick rebound.

In the nine months between April 09 and December 2009, it posted a sales growth of 25 per cent while its profits expanded by 29 per cent.

Though these growth numbers are on relatively depressed earnings, given that the period between October 08 and March 09 was one of the worst phases for commodity players, demand for zinc and lead have started picking up since November 2009. Hindustan Zinc registered a 24 per cent quarter-on-quarter sales growth, and its profits went up by 23 per cent in this period.

It is also one of the few base metals players that maintains a high operating profit margin of 67 per cent and a net profit margin of 50 per cent.

The company has taken on quite a few exploration projects and has sufficient internal funding. Hindustan Zinc, a cash-rich company with a debt burden of just about Rs 8.69 crore as on March 31 2009.

As on December 31, 2009, the company was left with a cash balance of Rs 10,700 crore and this translates into Rs 253 per share.

via BL