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Hind. Zinc: Lead, silver continue to shine - Views on News from Equitymaster

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Hind. Zinc: Lead, silver continue to shine
Jan 22, 2013

Hindustan Zinc has announced its December quarter results. The company has reported 14.1% YoY increase in net sales and 26.6% YoY increase in net profits for the quarter ended December 2012. Here is our analysis of the results.

Performance summary
  • Topline increased by 14.1% YoY during the quarter on back of higher volumes of lead and silver.
  • Operating profits of the company increased by 8.1% YoY due to higher realizations on lead and silver. However operating margins declined by 2.6%.
  • Net profits increased by 26.6% YoY on account of higher other income and lower taxes. Net profit margins increased by 5%.
  • Other income grows by 25.7% YoY.
  • For the nine months ended December 2012, the company posted a 6.3% YoY increase in net sales and 15.1% YoY increase in net profits.

Financial snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 27,864 31,780 14.1% 82,703 87,912 6.3%
Expenditure 14,050 16,840 19.9% 38,599 44,255 14.7%
Operating profit (EBDITA) 13,815 14,940 8.1% 44,104 43,657 -1.0%
Operating profit margin (%) 49.6% 47.0%   53.3% 49.7%  
Other income 4,027 5,063 25.7% 11,711 16,203 38.4%
Interest (net) 51 75 47.0% 209 183 -12.5%
Depreciation 1,627 1,772 8.9% 4,436 5,252 18.4%
Profit before tax 16,164 18,156 12.3% 51,170 54,426 6.4%
Exceptional Item 64 -   347 -  
Tax 3,363 2,031 -39.6% 9,691 7,089 -26.9%
Profit after tax/(loss) 12,736 16,125 26.6% 41,132 47,337 15.1%
Net profit margin (%) 45.7% 50.7%   49.7% 53.8% 8.3%
No. of shares (m)         8,451  
Diluted earnings per share (Rs)         8  
P/E ratio (x)*         17  
* On a trailing 12 months basis

What has driven the performance in 3QFY13?
  • Net sales increased by 14.1% YoY and 11.2% QoQ. This was mainly due to higher lead-silver volumes, further supported by higher London Metal Exchange (LME) prices for zinc and lead and London Bullion Market Association (LBMA) prices for silver. During the quarter, zinc LME prices improved by 3% YoY and lead LME prices increased by 11% YoY. Silver LBMA prices improved by 3%. Despite a marginal improvement in zinc prices, sales of zinc continued to decline and fell 1% YoY. However silver and lead continued to shine for the company. Silver sales increased by 151% YoY, while lead sales increased by 20% YoY.

  • Refined lead production went up by 11%, refined silver production increased by 103% when compared with the corresponding prior quarter. This was mainly due to higher volume of custom production. However, the positive impact of higher lead-silver volumes and rupee depreciation was offset by lower zinc volumes. Refined Zinc production in 3QFY13 was down 10% YoY but it improved 5% on a sequential basis.

    Cost break-up...
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Raw Materials 1,193 2,555 114% 2,129 4,403 107%
    % of sales 4.3% 8.0%   2.6% 5.0%  
    Stores and spares 2,689 2,993 11% 7,678 8,591 12%
    % of sales 9.7% 9.4%   9.3% 9.8%  
    Power & fuel 3,177 2,608 -18% 9,054 7,941 -12%
    % of sales 11.4% 8.2%   10.9% 9.0%  
    Mining royalty 2,005 2,688 34% 6,087 6,760 11%
    % of sales 7.2% 8.5%   7.4% 7.7%  
    Other mining & manufacturing expenses 2,655 3,268 23% 6,833 8,691 27%
    % of sales 9.5% 10.3%   8.3% 9.9%  
    Employee cost 1,337 1,692 27% 3,902 4,731 21%
    % of sales 4.8% 5.3%   4.7% 5.4%  
    Other Expenditure 993 1,035 4% 2,916 3,139 8%
    % of sales 3.6% 3.3%   3.5% 3.6%  

  • Operating profits of the company increased by 8.1% YoY. The cost of production (CoP) of zinc stood at Rs 44,900 per tonne (USD $829), against Rs 46,750 per tonne (USD $844) in 2QFY13. The positive impact of operational efficiencies and lower coal prices was more than offset by increase in commodity prices, higher excavation and lower by-product credits. Higher mining and manufacturing costs were largely on account of usage of purchased concentrate. The company had purchased concentrate inventory in the last quarter, which will be used in the current quarter, resulting in higher costs. As a result, operating margins declined by 2.6% YoY.

  • Net profits increased by 26.6% YoY and 4.7% QoQ. This was due to higher other income and lower taxes. Bottomline was again boosted by the higher other income of Rs 5.06 bn, backed by higher yield (post tax 9%) and higher interest rate. Going ahead however, a slight reduction is likely due to maturity of high yielding investments and also due to expected fall in interest rate. Tax rate for the quarter stood at 12.5%. The management has maintained 15% tax rate guidance for full FY13 mainly due to benefits from wind power, captive power plant and exemption on refineries in Uttarakhand.

What to expect?
The company has finalised the next phase of growth plan, which will involve sinking of underground shafts and developing underground mines. The plan comprises of developing a 3.75 million tonne per annum (mtpa) underground mine at Rampura Agucha and expanding Sindesar Khurd (SK) mine from 2.0 mtpa to 3.75 mtpa, Zawar mines from 1.2 mtpa to 5.0 mtpa, Rajpura Dariba mine to 1.2 mtpa and Kayad mine to 1.0 mtpa. It will also involve opening up of a small new mine at Bamnia Kalan in Rajpura Dariba belt. The growth plan will increase mined metal (MIC) production capacity to 1.2 mtpa. The projects will be completed in six years and benefit of growth projects will start flowing in from third year, even as projects will continue till FY18-19. Annual capex for these projects will average USD $250 m a year over next six years.

At the current price, the stock is trading at a multiple of 1.8 times our estimated FY15 book value of the company. We maintain a Hold view on the stock of the company.

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