Hindustan Zinc, Hindalco shares: Jefferies ups target prices, prefers this stock

Jefferies in a fresh note on metals and mining sector said the recent divergence in metal prices has favorable earnings implications for Hindustan Zinc (HZL) while weighing on Hindalco Industries Ltd. Zinc and silver prices are shining brighter than aluminum, it said as it preferred Hindustan Zinc over Hindalco Industries Ltd
The foreign brokerage suggested a Buy on HZL with a revised target of Rs 750 from Rs 660 earlier, implying a 31 per cent total shareholder return. This includes an estimated 4 per cent dividend yield. Jefferies suggested 'Hold' on Hindalco while raising its target price to Rs 1,140 from Rs 1,100, suggesting a healthy 9 per cent upside.

The foreign brokerage said spot zinc price is 15 per cent above June quarter average, and silver has recovered 23 per cent from July lows. In contrast, Jefferies said aluminum price is 10 per cent below the June quarter average. Citing this, the foreign brokerage has raised its FY27-29 earnings estimates for Hindustan Zinc by 10-11 per cent, but cut Hindalco's estimates by 2-3 per cent.

"We raise our HZL's FY27-29E EPS by 10-11 per cent factoring in higher zinc & silver prices; our estimates are now 16-23 per cent above consensus. At spot zinc and silver prices, HZL's FY28 EPS could see a further potential upgrade of 12 per cent. We cut our Hindalco's FY27-29E EPS by 2-3 per cent factoring lower aluminum prices," Jefferies said.

It said despite ongoing capacity expansions at both companies, HZL's net cash position is seen increasing from Rs 5,200 crore in FY26 to Rs 22,700 crore by FY29. Hindalco's net debt rose a sharp 74 per cent in FY26, and Jefferies said a further 13 per cent YoY rise in FY27 is likely, adding that Hindalco's net debt should start to ease in FY28.

As far as valuaions are concerned, Jefferies said HZL's valuation, at
7.5 times one-year forward EV/Ebitda, is slightly below last 10-year average of 7.8 times and is reasonable. Its revised target on Hindalco comes after the broking firm rolled over its estimates to September 2028. Hindalco, it said trades at 1.3 times one-year forward price-to-book value  for a 15-18 per cent return on equity (ROE) against long-term average of 0.9 times for 11 per cent ROE. "Its 6.2 times one-year forward EV/Ebitda is broadly in line with historical average," Jefferiesn said.