ET Intelligence Group: Shares of Hindustan Zinc, the second-largest zinc miner in the world have been resilient over the past few months despite the broader equity market being weaker. While the BSE Metal Index is down 31% in the last one year, shares of Hindustan Zinc are down only 2%, despite a 22% fall in zinc prices. Anil Agarwal, promoter of Vedanta group, Hindustan Zinc’s parent company, recently said that 2017 would be a good year for base metals and zinc is likely to lead the rally. He could well be right. According to International Lead and Zinc Study Group, global zinc demand for 2016 is expected to be 14.4 milion tonnes (MT), marginally exceeding the 14.2 MT supply. Global zinc inventories have increased 4.5% over the past one month. In addition, some of the mines which currently produce around 1.5 MT zinc are expected to go off stream next year, which will widen the demand supply gap even more. Zinc price has risen 11% since the beginning of 2016. Hindustan Zinc may well emerge as the top beneficiary if the demand cycle really turns around considering that it is one of the most cost-competitive players and enjoys proximity to major markets. In the nine months to December 2015, Hindustan Zinc’s profits fell 2%, while revenue rose 3%. This was despite the fall of over 18% in zinc prices during that period. The company was benefited by higher year-on-year silver production. Silver and lead contribute less than 20% of the sales. With improving demand supply scenario, earnings are expected to show better growth. Analysts are expecting a recovery in the company’s business in the coming quarters. Anuj Singla of Deutsche Bank mentioned in a report, “Hindustan Zinc reported a betterthan-expected performance in 3Q’FY16, despite a subdued pricing environment, which reinforces our positive view on the stock.” Jigar Mistry, metal analyst with HSBC said, “We continue to like the Hindustan Zinc story and re-iterate our buy on the stock.” It has a market cap of Rs 72,225 crore and cash and total investments of around Rs 35,000 crore. The company’s enterprise value is 5.7x the FY17 expected operating profit before depreciation (EV/EBIDTA). The valuation is likely to improve with better earnings growth. High cash and promoter’s interest to buy government’s 29.5% stake should keep the downside limited.