Tuesday, 15 December 2015

Silver Lining For Hindustan Zinc : 15 Dec 2015

Even as base metal prices remain weak leading to continued pressure on non-ferrous stocks, there are a few like Hindustan Zinc the street is bullish on. The stock that had seen its low in August led by weak sentiments and falling zinc prices has rebounded thereafter and seems evenly poised at current levels too. While zinc prices remain weak, the premiums have now stabilised after seeing pressure in earlier months. Premium represents the extra price over benchmark rate prevailing in the market that a buyer of the metal pays. Analysts at Elara in their monthly metal updates for November said that although base metals at LME (London Metal Exchange) continued to fall, the regional premium on zinc and aluminium remain firm. What more, fundamentals for zinc remain strong now, they added. As per ILZSG (international lead zinc study group), the global zinc demand-supply was balanced in the September'15 quarter with world metal production and demand of 3.5 million tonnes each. The closure of large zinc mines including Century, Lisheen and Glencore in December'15 quarter will likely curtail supplies, say analysts at Kotak Institutional Equities. They expect the zinc market to be in deficit of 230,000 tonnes in the calendar year 2016 compared to a surplus of 235,000 tonnes in 2015 due to three per cent fall in global zinc production. They also highlight that unlike aluminium, global inventories of zinc are not high at around 1.5-2 million tonnes, which is equivalent to 50-60 days of consumption. Elara too highlights that zinc fundamentals remain strong, given production cutbacks announced by Glencore as well as by Chinese producers (500,000 tonnes each). This represents about seven per cent of world consumption. Though there are news reports suggesting that there will be probes by China on short-selling, metal prices nevertheless will also be influenced by the outcome of Fed rate hike decision in the near term. But more importantly, the cost of production will play a vital role in determining how low prices can go from here on, and now production cuts indicate that the support levels on costs have been achieved. Analysts at Elara believe cost support will play an important role and, expect prices to inch up. Thus, they suggest a trading opportunity in select non-ferrous companies on account of company-specific triggers as well as the possibility of a marginal uptick in base metal prices. They reiterate Buy on Hindustan Zinc. Hindustan Zinc is benefiting from increasing volumes too. During the quarter ending September'15, its integrated refined zinc metal production increased 21 percent year-on-year to 211,000 tonne (up 13 per cent sequentially). Higher volumes along with an uptick in prices and lower costs should lead to visible gains for the company. The target price for the stock at Rs 177 (Motilal Oswal), Rs 180 (Kotak) and Rs 191 (Elara) indicates 21-31 percent upside from current levels of Rs 146.

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