Difficult times ahead; Covid-19 fears outweigh strong dividend yield
* The company posted strong results but uncertain outlook guided management’s decision to defer FY21 guidance by one quarter. Even though utilization level is 80% currently, uncertainty due to Covid-19 has dented outlook in an otherwise strong quarter despite 10 days of shutdown.
* Projects continued to be delayed as international travel ban interrupted movement of specialists required for commissioning the projects. A 3-month delay with low capacity utilization overall in Q1FY21 is likely to result in 9% decline in metal production in FY21.
* We cut FY21/22 metal sales volume by 13%/4% and silver sales volume by 18%/13%. We also cut Zinc LME price assumptions by 21%/20% and Lead LME by 30%/29% for FY21/22 as major economies struggle to boost demand.
* Strong dividend yield expectation of c.9% for FY21/FY22 is the silver lining, in our view. We maintain Hold rating but revise down FY21/22 EBITDA by 37%/26%, roll forward valuation from Sep-21E to Mar-22E and reduce TP from Rs 200 to Rs187 with OW in EAP due to dividend yield.
What did we like?
Strong operating performance despite shutdown in the last 10 days resulted in sharp outperformance vs. our expectations. We note that management changed its strategy of market mix from 70% domestic in pre-Covid times to 70% in exports currently to ensure the company is able to sell its output despite its major domestic market not available due to lockdown.
What we did not like?
We believe continued delay in the commissioning the projects is likely to result in a yoy decline of about 9% in total mined metal production. The decline is also a result of 8 days of shutdown in April, and lower utilization levels in April and May compared with the historical standards of the company
Outlook and valuations
We believe the fortunes of the commodities are strongly tied up to the opening up of economies while containing the pandemic at the same time. With no clear signs of a cure and looming threat of second wave on one hand, with strong dividend yield at CMP on other hand, we maintain Hold with revised TP of Rs187 based on 6x Sep-22E EV/EBITDA. Key risks to our call are: 1) recovery in global economies driving demand for zinc and hence upswing in zinc prices; and 2) second wave of pandemic as economies open up, resulting in severe economic downturn resulting in depressed LME prices.
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