October 15, 2010

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HINDUSTAN ZINC LIMITED BUY

Hindustan Zinc Limited (HZL) is an integrated mining and resources producer of zinc, lead,

and silver. It is a subsidiary of Vedanta Resources PLC and is the world’s largest fully

integrated Zinc producing company, with about 90% production share and around 80%

market share in domestic market. It is also India’s leading Lead producer.

• One of the world’s lowest cost producers of Zinc and Lead owing to its captive mines and

power plants.

• The company has exclusive mining rights and continuously increasing capacity, making it

the only choice for its customer. This, combined with a significant cost advantage, strong

sales realization helps HZL post robust growth in revenues.

• HZL’s captive mines of zinc and lead ore are located in Rajasthan; with total reserves of

298.6 MT. The average Zinc content across mines stands at ~ 8.7%, one of the highest

globally.

• HZL is focusing aggressively on increasing its silver production. It expects to become Asia’s

largest and world’s sixth largest silver-producing company by 2013

• HZL is a debt free company and at the end of FY10 had a net cash balance of Rs. 118bn.

Based on the consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for

the company works out to Rs. 1450

Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy

Buy

Hold

Reduce

SellStrong Buy – Expected Returns > 20% p.a.

Buy – Expected Returns from 10 to 20% p.a.

Hold – Expected Returns from 0 % to 10% p.a.

Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk

Sell – Returns < 0 %

STOCK DATABSE / NSE Code

Bloomberg Code

No. of Shares (Mn)

Sensex / Nifty

PRICE DATACMP Rs (13th Oct' 10)

Beta

Market Cap (Rs mn)

52 Week High-low

Average Daily Volume

STOCK RETURN (%)30D 3M 6M 1Y

Hindustan Zinc 11% 24% -1% 46%

Sensex 8% 15% 16% 22%

Nifty 8% 15% 17% 23%

SHARE HOLDING PATTERN (%)Promoter

Institutional

Non Institutional

Total

1 Year Price Performance (Rel. to Sensex)

1,221

500188 / HINDZINC

HZ IN EQUITY

423

20,688 / 6,234

30

6

100.0

1.25

516,102

1,325 / 830

48,840

65

Financial Snapshot

Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Revenue 78,778 56,803 80,170 84,915 95,486

Y-o-Y Growth % -28% 41% 6% 12%

EBIDTA 62,300 36,654 53,923 56,428 59,561

Y-o-Y Growth % -41% 47% 5% 6%

PAT 43,961 27,276 40,414 43,786 45,907

Y-o-Y Growth % -38% 48% 8% 5%

EPS Rs 104 65 96 104 109

BVPS Rs 280 340 429 527 631

EBIDTA % 79% 65% 67% 66% 62%

NPM % 56% 48% 50% 52% 48%

ROE % 37% 19% 22% 20% 17%

PER x 11.8 11.2

P/B Ratio 2.3 1.9

EV/EBIDTA 6.9 6.6-20

-10

0

10

20

30

40

50

60 Sensex HZL

October 15, 2010

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Hindustan Zinc Ltd. (HZL) is world’s largest zinc-producing company. It has one of the largest mining assets in the world.

The company is engaged in mining and refining ore to produce non-ferrous metals – zinc, lead and silver along with captive

power generation. Its operations are fully-integrated from mining to production of metals. HZL have four mines and four

smelting operations. Mines are situated at Rampura Agucha, Sindesar Khurd, Rajpura Dariba and Zawar in the State of

Rajasthan, while the smelters are located at Chanderiya, Debari and Dariba in the State of Rajasthan and Vizag in the State of

Andhra Pradesh. Its captive mines and thermal power plants give the company a significant cost advantage, making it one of

the lowest-cost producers of zinc in the world. HZL has the ability to charge high prices due to its exclusive mining rights and

this has resulted in an excellent financial track record. HZL is well-poised to grow in the short-term, led by an uptick in global

zinc demand due to the strong recovery in steel, construction, engineering & automotive industry. HZL is also focusing

aggressively on increasing its silver production. It expects to become Asia’s largest and world’s sixth largest silver-producing

company by 2013 with a total production of 5, 00,000 kg per annum. Currently the company produces 1, 00,000 kg of silver.

HZL has undertaken expansion of its Sindesar Khurd mines in Rajasthan to augment its capacity. Currently, around 77% of

India’s annual silver demand is met through imports. At present, Hindustan Zinc’s market share in the domestic market is

2.5%. Post-expansion of the capacity, it is likely to be Asia’s largest primary silver producer. Zinc is used in many sectors such

as infrastructure, construction, consumer durables and automobiles. Lead is mainly used in battery sector.

Rampura Agucha mine is an open cast mine and has Zinc content of 13.4% and Lead content of 1.9%. Also open cast mines have higher recovery ratio and lower cost of extraction Lower than expected Zinc/ Lead prices on the back of reduced demand globally could result in lower profitability

Key risk and concerns… HZL revenues are directly linked with the global market for zinc and lead which are priced with reference to LME prices.

Adverse fluctuation in prices of these commodities could have a significant impact on financial performance.HZL is thus

exposed to commodity price risks and exchange rate fluctuations both of which are highly volatile in nature. Further

increase in royalty rates by GOI could negatively affect profitability. Metals and mining is an environmental sensitive

industry and hence any change in policy could affect the company’s production. Being a cyclical industry, delay in capacity

expansion plan would negatively affect the company.

BUSINESS PROFILE

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2008A 2009A 2010A

Refined Production Breakup (tpa)

H2SO4 Zinc Silver Lead

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Lead (USD/Tonne) Zinc (USD/Tonne)

October 15, 2010

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Steady performance...

With higher Zinc and lead prices on Y-o-Y basis, the revenue of Hindustan Zinc for Q1 FY11 grew 29% Y-o-Y to Rs

19,730mn. During the quarter, the average zinc and lead prices at LME stood at USD 2,018 per tonne and USD 1,944

per tonne, up 37% and 29% Y-o-Y respectively. The zinc volume during Q1 FY11 was up 18% Y-o-Y to about 164,500

tonne while lead was down 13% to 15,300 tonne. On Q-o-Q basis the revenue was down 22% due to lower zinc and

lead prices at LME (each lower by 12% on Q-o-Q) and lower silver sales. The OPM was up by 60 bps Y-o-Y to 51.8%.

Exploration

Ongoing exploration activities by HZL have yielded significant success with the gross addition of 33.7 million tonnes

to reserves and resources prior to a depletion of 7.1 million tonnes in FY 2010. Contained zinc-lead metal has

increased by 3.4 million tonnes, prior to a depletion of 0.8 million tonnes during the same period. Total reserves and

resources at 31 March 2010 were 298.6 million tonnes containing 34.1 million tonnes of zinc-lead metal. The success

of exploration efforts has been primarily in the Sindesar Khurd and Rajpura Dariba belt where there is a combined

reserve and resource base of 103.03 million tonnes (FY 2009: 83.4 million tonnes).The Company has been successful in

its exploration efforts with the addition of 185.8 million tonnes of reserves and resources in the period of April 2004 to

March 2010, including depletion of 33.4 million tonnes. The 210,000 TPA Hydro Zinc Smelter at Rajpura Dariba

commissioned in Q4 FY10 is ramping up well and contributed 33,000 tonne in Q1 FY11. Construction activity at the

100,000 TPA lead smelter at Rajpura Dariba is progressing as planned, and is on schedule for completion by Q2

FY2011. Of the 160MW captive power plant, is expected to be synchronized in September 2010. Development activity

at Sindesar Khurd mine project is on schedule, with production expected to commence from Q2 FY 2011.

Peer Comparison

Since HZL is purely into production of Zinc and Lead and being a market leader there is no company as peers for

comparative valuation. With increasing commodity prices, jump in volume and high realization rate, the company is

set to register higher profitability and improved return ratios. It is more appropriate to value the stock on an

EV/EBIDTA basis due to high level of cash on books and also due to cyclical nature of commodity prices. However, the

company should command a target multiple of 7.5 EV/EBIDTA times due to healthier balance sheet and net cash.

BUSINESS PERFORMANCE

Zinc and Lead operations contributes about 99% of the total revenue and rest by merchant power sale

HZL should command a target valuation of 7.5× EV/EBIDTA due to healthier balance sheet and net cash of Rs. 393/share in FY12E

0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

Quarterly Performance

Revenue (Rs mn) EBITDA Margins

0%

20%

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120%

140%

-

20,000

40,000

60,000

80,000

100,000

120,000

FY09A FY10A FY11E FY12E

Revenue, EBIDTA & PAT margins

Revenue (Rs Mn) EBIDTA Margin PAT Margin

October 15, 2010

www.fullertonsecurities.co.in Page | 4

Based on a consolidated

FY12 EV/EBIDTA multiple of

7.5, the fair value for the

company works out to Rs

1450

VALUATION Future Outlook: India’s per capita consumption of zinc is currently ~0.3kgs as compared to China’s 1.9 kgs,

Japan’s 5.5 kgs and North America’s 3.4 kgs per annum. With growth in infrastructure, construction, consumer

durables and automobiles there exists an immense opportunity domestically. 37 Infrastructure projects worth Rs

70,000 Crore have already been approved by the Indian Government including various projects for Railway

Electrification, Ports, Airports, power projects etc. In the long-term, we see a promising future for Zinc demand in

India. As is typical of all developing economies, the growth rate of metal consumption in India is expected to be

1.5 times the GDP growth rate.

We expect HZL’s revenues to grow at a CAGR of 9% over FY2010-12 to Rs 95,486mn by FY2012. We further

estimate that the PAT would grow at a CAGR of 7% over FY2010-12 to Rs 45,907mn in FY2012 from Rs 40,414mn

in FY2010.

Based on a consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for the company works out to Rs

1450

We recommend a ‘Buy’ rating on the stock.

Financial Analysis and Projections

Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Net Revenue 78,778 56,803 80,170 84,915 95,486

Other Income 8,516 9,312 7,222 8,759 9,468

Total Income 87,294 66,115 87,392 93,674 104,953

Operating Expenditure 24,994 29,461 33,469 37,246 45,393

Depreciation 2,205 2,853 3,343 3,626 4,251

EBIT 60,095 33,801 50,580 52,803 55,310

EBIT Margin (%) 76% 60% 63% 62% 58%

Interest Expenses 242 219 439 48 0

Profit Before Tax 59,853 33,582 50,141 52,754 55,310

Less: Tax 15,893 6,306 9,727 8,968 9,403

Profit After Tax 43,961 27,276 40,414 43,786 45,907

PAT Margin (%) 56% 48% 50% 52% 48%

ROE (%) 37% 19% 22% 20% 17%

EPS (Rs) 104 65 96 104 109

BVPS (Rs) 280 340 429 527 631

Valuation Ratios (x) FY11E FY12E

EV/EBIDTA 6.92 6.55

PER x 11.8 11.2

P/B Ratio 2.3 1.9

October 15, 2010

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Director Name Current Position Description

Agnivesh AgrawalNon-Executive Chairman of the

Board

Shri. Agnivesh Agarwal is Non-Executive Chairman of the Board of Hindustan Zinc Limited since 15 November 2005. Mr. Agarwal

is an eminent industrialist with a knowledge of business operations, has a experience in managing projects, business

restructuring and strategy. Over the years he has developed an excellent commercial knowledge with hands on experience. He

is also the Director of Madras Aluminium Company Limited, Sterlite Iron and Steel Company Limited, Sterlite Infrastructure Pvt.

Limited, Agarwal Galvanizing Pvt. Limited, and Sterlite Infrastructure Holdings Pvt. Limited. Mr. Agarwal has completed his

graduation in commerce from Sydenam College, Mumbai.

Akhilesh JoshiChief Operating Officer, Whole

Time Director

Shri. Akhilesh Joshi is Chief Operating Officer and Whole Time Director of Hindustan Zinc Limited since 21 October 2008. He

joined the company in 1976. Prior to becoming COO of Hindustan Zinc, he was senior vice president (Mines), responsible for the

overall operations at all mining units. Mr Joshi has a mining engineering degree from MBM Engineering College, Jodhpur and

post graduate diploma in economic evaluation of mining projects from School of Mines of Paris. He also has a first class mine

manager certificate of competency. He is the recipient of National Mineral Award (GOI) in 2006 for his contribution in the field of

mining technology.

Navin Agrawal Non-Executive Director

Shri. Navin Agarwal is Non-Executive Director of Hindustan Zinc Limited since 11 April 2002. Mr Navin Agarwal is Deputy

Executive Chairman of Vedanta Resources Plc and was appointed to the company's Board of Directors on 11 April 2002. He is also

the Chairman of Konkola Copper Mines and the Madras Aluminium Co Ltd, Executive Vice Chairman of Sterlite Industries ( India )

Ltd and Director of Vedanta Aluminium Limited, Sterlite Iron and Steel Company Limited, Sterlite Infrastructure Private Limited,

Sterlite Infrastructure Holdings Private Limited, Vedanta Resources Holdings Limited, Vedanta Resources Investment Limited and

Bharat Aluminium Company limited. Mr Agarwal has over 20 years of experience in strategic and operational management. He

has been the driver behind the company's growth. He holds a Bachelor of Commerce degree from Sydenham College, Mumbai,

and has also completed the Owner/ President Management Program at Harvard University.

Ajita PandeIndependent Director - Nominee

of Government of India

Smt. Ajita Bajpai Pande is Independent Director - Nominee of Government of India for Hindustan Zinc Limited since 24 October

2005. Ms. Pande is an IAS (Indian Administrative Service) Officer and is presently holding the post of Joint Secretary, Ministry of

Mines, New Delhi. She is also the Director of Hindustan Copper Ltd, Hindustan Diamond Co. Ltd. and BALCO.

Sanjiv MittalIndependent Director - Nominee

of Government of India

Shri. Sanjiv Kumar Mittal is Independent Director - Nominee of Government of India for Hindustan Zinc Limited since 28 March

2007. Mr Mittal is an IAS (Indian Administrative Service) officer and presently holding the post of Joint secretary and Financial

Advisor, Government of India, Ministry of Mines, New Delhi. He is also the Director of BALCO, Hindustan Copper Ltd and Coal

India Ltd.

A.

NarayanaswamyIndependent Director

Shri. A. R. Narayanaswamy is Independent Director of Hindustan Zinc Limited since 30 March 2009. He is a member of The

Institute of Chartered Accountants of India and has experience in the industry. He is also on the Board of Madras Aluminium

Company Limited and Sterlite Technology Limited, IBIS Softec Solutions (P) Ltd, IBIS Logistics (P) Ltd and IBIS Systems & Solutions

(P) Ltd.

Board Of Directors