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Hindustan Zinc: Muted performance - Views on News from Equitymaster

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Hindustan Zinc: Muted performance
Jan 22, 2014

Hindustan Zinc has announced its December quarter results. The company has reported 8.6% YoY increase in net sales and 6.8% YoY increase in net profits for the quarter ended December 2013. Here is our analysis of the results.

Performance summary
  • Topline grows by 8.6% YoY during the quarter, due to increase sales volumes of zinc, lead and silver.
  • Operating margins increased by 5.8% with operating profits going up by 21.7% YoY
  • Bottomline grows by 6.8% YoY. Net profit margins declined by 0.8% YoY.
  • Other income declined by 15.5% YoY due to mark-to-market losses on investments during the quarter.
  • For the nine months ended December 2013, the company posted a 13.7% YoY increase in net sales and 6.1% YoY increase in net profits.

(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 31,780 34,501 8.6% 87,912 99,934 13.7%
Expenditure 16,796 16,263 -3.2% 44,053 47,871 8.7%
Operating profit (EBDITA) 14,984 18,238 21.7% 43,859 52,063 18.7%
Operating profit margin (%) 47.1% 52.9%   49.9% 52.1%  
Other income 5,015 4,240 -15.5% 16,022 13,107 -18.2%
Interest (net) 71 100 41.2% 203 247 21.7%
Depreciation 1,772 2,097 18.3% 5,252 5,805 10.5%
Profit before tax 18,156 20,280 11.7% 54,426 59,119 8.6%
Exceptional Item - -   - 617  
Tax 2,031 3,053 50.4% 7,089 8,268 16.6%
Profit after tax/(loss) 16,125 17,227 6.8% 47,337 50,234 6.1%
Net profit margin (%) 50.7% 49.9%   53.8% 50.3%  
No. of shares (m)         4,225  
Diluted earnings per share (Rs)         16.7  
P/E ratio (x)*         7.7  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • Net sales of Hindustan Zinc (HZL) increased by 8.6% YoY led by increased sales volumes of zinc, lead and silver. Mined metal production was at 220,126 tonnes in 3QFY14 lower by 5.5% YoY (232,926 tonnes in 3QFY13). Refined zinc production (integrated) volumes increased 17.0% YoY to 196 kt due to higher production from the Rampura Agucha mine and Zawar mines; refined silver production (integrated) volumes also grew 35.0% YoY to 72 kt.

    Cost break-up..
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Raw Materials 2,511 576 -77% 4,201 953 -77%
    % of sales 7.9% 1.7%   4.8% 1.0%  
    Stores and spares 2,993 3,391 13% 8,591 10,067 17%
    % of sales 9.4% 9.8%   9.8% 10.1%  
    Power & fuel 2,608 2,893 11% 7,941 8,637 9%
    % of sales 8.2% 8.4%   9.0% 8.6%  
    Mining royalty 2,688 2,589 -4% 6,760 7,774 15%
    % of sales 8.5% 7.5%   7.7% 7.8%  
    Other mining & manufacturing expenses 3,268 3,855 18% 8,691 11,311 30%
    % of sales 10.3% 11.2%   9.9% 11.3%  
    Employee cost 1,692 1,591 -6% 4,731 5,137 9%
    % of sales 5.3% 4.6%   5.4% 5.1%  
    Other Expenditure 1,035 1,368 32% 3,139 3,991 27%
    % of sales 3.3% 4.0%   3.6% 4.0%  

  • The company's cost of zinc production rose by 16.0% YoY to Rs 52,014/tonne due to higher diesel costs and rupee depreciation as most inputs costs are related to international prices. The EBITDA however grew by 21.7% YoY due to lower staff costs (-6.0% YoY) and lower mining royalty (-3.7% YoY).

  • The other income for the quarter decreased by 16.3% YoY and depreciation expenses increased by 18.3% YoY. The tax rate also increased to 15.1% in 3QFY14 (11.2% in 3QFY13). Hence the net profit grew by a muted 6.8% YoY.
What to expect?
Hindustan Zinc revised down its FY14 mined metal production guidance from 950 kt in 2QFY14 to 900 kt, on account of delay in ongoing ramp activities in ongoing mining projects primarily in Kayad and Rampura Agucha. Integrated silver production guidance has also been revised down from 335 kt to 290-300 kt due to expectation of lower lead production. However, lower volumes would be partly offset by higher LMEs.

Mine development is progressing well at all underground projects. The Kayad mine became operational during the quarter. Project capex will be in line with the guidance of US $250 m per year.

At the current prices of Rs 129 the stock is trading at 7.7 times its trailing twelve month earnings. We expect robust volume growth of zinc, lead and silver over FY14-16 while we do not expect meaningful downside in zinc and lead prices from current levels. We maintain a Buy view on the stock of the company. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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