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Hindustan Zinc: Other income boosts profits - Views on News from Equitymaster

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Hindustan Zinc: Other income boosts profits
Jan 28, 2015

Hindustan Zinc has announced its December quarter results. The company has reported 11.7% YoY increase in net sales while profits have grown by 38.1% YoY for the quarter ended December 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 11.7% YoY during the quarter, driven by higher zinc LME price and lead & silver metal volumes; partly offset by lower silver price. Silver prices declined 21% YoY while zinc LME prices were up by 17% YoY.
  • Operating profits increased 14.6% YoY due to strong topline growth and lower cost of production. The cost of production for zinc (without royalty) was down 3% YoY both in Rupee and Dollar terms respectively for the quarter.
  • Bottomline increases by 38.1% YoY accentuated by near doubling of other income and fall in interest expenses.
  • As of 3QFY15, cash balance stood at Rs 289.8 bn.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Sales 34,501 38,531 11.7% 99,934 106,627 6.7%
Expenditure 16,263 17,639 8.5% 47,871 52,216 9.1%
Operating profit (EBDITA) 18,238 20,892 14.6% 52,063 54,412 4.5%
Operating profit margin (%) 52.9% 54.2%   52.1% 51.0%  
Other income 4,240  8,122 91.6% 13,107 22,262 69.8%
Interest (net)    100          8 -92.1%  247      97 -60.7%
Depreciation 2,097  2,090 -0.3%  5,805 6,174 6.4%
Profit before tax 20,280 26,916 32.7% 59,119 70,402 19.1%
Exceptional Item       -           -   NA  617      28 -95.4%
Tax 3,053  3,122 2.3%  8,268 8,569 3.6%
Profit after tax/(loss) 17,227 23,794 38.1% 50,234 61,806 23.0%
Net profit margin (%) 49.9% 61.8%   50.3% 58.0%  
No. of shares (m)         4,225  
Diluted earnings per share (Rs)         14.6  
P/E ratio (x)*         9.0  
* On a trailing 12 months basis

What has driven performance in 3QFY15?
  • Net sales of Hindustan Zinc (HZL) increased by 11.7% YoY. Mined metal production was at 242,417 MT in 3QFY15 higher by 10% YoY (220,126 MT in 3QFY14). The increase is driven by higher production from Rampura Agucha mine and better ore grades. Refined zinc production (integrated) volumes declined 2% YoY to 192,000 MT while refined silver production (integrated) volumes declined by 4% YoY to 70,000 MT.

  • The company's cost of zinc production (before royalty) declined by 3% YoY to Rs 50,534/ton due to lower diesel cost partly offset by lower linkage of coal and increased employee expenses on account of long term wage agreement.

  • EBITDA improved by 14.6% YoY due to higher LME prices for zinc and lower cost of production.

  • Net profits increased by 38.1% YoY. The rise at the net level was cushioned by strong operating performance as well as a 91.6% YoY growth in other income (boosted by treasury gains). This coupled with a 92.1% YoY fall in interest expenses propelled profitability growth.
What to expect?
Unlike preceding two quarters volumes were up (mined metal production was up 10% YoY) this time around. As expected, the situation has improved in the second half of the year as more ore is being extracted. While the expansion plan at Sindesar Khurd mine is better than expected, the one at Rampura Agucha is behind schedule.

At the current price of Rs 171 the stock is trading at 9 times its trailing twelve month earnings. With mine production expected to get a boost at Rampura Agucha (management plans to deepen the open cast mine by 50 meters thus converting it into an underground mine) the company would stand to benefit. The work towards this transition has already started in the current quarter. Taking into consideration the recent developments and current valuations we maintain our HOLD view on the stock. However, 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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