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Hindustan Zinc: Low zinc, lead prices hurt profits - Views on News from Equitymaster

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  • Apr 21, 2012 - Hindustan Zinc: Low zinc, lead prices hurt profits

Hindustan Zinc: Low zinc, lead prices hurt profits
Apr 21, 2012

Hindustan Zinc has announced its March quarter results. The company has reported a 3.2% YoY decline in net sales and 20.2% YoY decline in net profits for the quarter ended March 2012. Here is our analysis of the results.

Performance Summary
  • Topline declined by 3.2% YoY during the quarter, led by 11% YoY decline in sales of zinc.
  • Operating profits declined by 15.5% YoY during the quarter on account of high raw material cost.. Operating margins also declined by 7.7%.
  • Net profits declined by 20.2% YoY on account of higher input cost, lower zinc and lead prices and higher taxes. Net profit margins declined by 9.6%.
  • Other income grows by 23.5% YoY.
  • For the full year ended March 2012 the company posted a 13.6% YoY and 12.8% YoY increase in net sales and net profits respectively.
  • The company has announced a final dividend of 45% which is 0.9 per equity share. The total dividend, including interim dividend already paid for FY12 is 120% or Rs 2.4 per share, which is the highest ever proposed by the company.

(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 32,373 31,350 -3.2% 100,392 114,053 13.6%
Expenditure 12,741 14,760 15.8% 44,315 53,359 20.4%
Operating profit (EBDITA) 19,632 16,590 -15.5% 56,077 60,694 8.2%
Operating profit margin (%) 60.6% 52.9%   55.9% 53.2%  
Other income 3,086 3,811 23.5% 8,660 15,428 78.2%
Interest (net) 141 24 -82.9% 183 140 -23.7%
Depreciation 1,271 1,671 31.5% 4,747 6,107 28.6%
Profit before tax 21,306 18,706 -12.2% 59,807 69,876 16.8%
Exceptional Item - 84   212 431 103.8%
Tax 3,594 4,494 25.0% 10,591 14,185 33.9%
Profit after tax/(loss) 17,713 14,128 -20.2% 49,005 55,260 12.8%
Net profit margin (%) 54.7% 45.1%   48.8% 48.5%  
No. of shares (m)         8450.6  
Diluted earnings per share (Rs)         6.54  
P/E ratio (x)*         19.42  
* On a trailing 12 months basis

What has driven performance in 4QFY12?
  • The 3.2% YoY decline in net sales was primarily on account of lower London Metal Exchange (LME) prices for zinc and lead. Zinc LME prices declined by 15% quarter on quarter (QoQ) and lead LME prices declined by 20% QoQ. This manifested into 11% YoY decline in sales of zinc. However silver continued to shine for the company. Silver sales increased by 8% YoY. Silver prices were also up by 2% QoQ. For the full year ended March 2012, the 13.6% increase in net sales was on back of impressive performance of lead and silver. Net sales for lead and sliver for FY12 increased by 33% and 64% respectively.

  • Refined Zinc production was 6% higher at a record 0.75 m tonnes for the full year and marginally lower at 0.19 m tonnes in 4QFY12, primarily on account of higher utilization of new generation smelters in Rajasthan and ramp-down of Vizag smelter during the quarter. Lead production was at a record 99,000 tonnes in FY12 and 37,000 tonnes in 4QFY12, up 56% and 110% respectively. Silver production was at a record 242 tonnes in FY12 and 88 tonnes in 4QFY12, up 35% and 77% respectively. The increase in Lead & Silver production was primarily on account of the ramp-up of the SK mine, Dariba Lead smelter and the new Silver refinery.

    Cost break-up...
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw Materials 329 993 201.85% 136 3121 2196.8%
    % of sales 1.0% 3.2%   0.14% 2.7%  
    Stores and spares 2394 2788 16.5% 8829 10467 18.5%
    % of sales 7.4% 8.9%   8.8% 9.2%  
    Power & fuel 2848 3225 13.2% 10226 12278 20.1%
    % of sales 8.8% 10.3%   10.2% 10.8%  
    Mining royalty 2510 2291 -8.7% 8033 8379 4.3%
    % of sales 7.8% 7.3%   8.0% 7.3%  
    Other mining & manufacturing expenses 2142 2728 27.4% 8400 9561 13.8%
    % of sales 6.6% 8.7%   8.4% 8.4%  
    Employee cost 1341 1445 7.7% 5108 5346 4.7%
    % of sales 4.1% 4.6%   5.1% 4.7%  
    Other Expenditure 1178 1290 9.5% 3582 4206 17.4%
    % of sales 3.6% 4.1%   3.6% 3.7%  

  • Operating profits declined by 15.5% YoY. This was due to increase in power and fuel cost and raw material cost. The increase in costs was largely on account of significant increase in input commodity prices (especially coal) and Rupee depreciation.

  • Net profits saw a decline of 20.2% YoY for 4QFY12. The drop in profit was due to a dip in realizations, higher teaxes and higher operational cost. The positive impact of increased volumes and Rupee depreciation was partially offset by the decline in LME prices. For the full year ended March 2012, the company achieved record net profits of Rs 55 bn.

What to expect?
During the year, the company commissioned the Dariba Lead smelter and a new Silver refinery, both of which are ramping up as per schedule. Sindesar Khurd (SK) mine achieved 1.8 million tonne per annum (mtpa) towards the end of 4QFY12, which is equal to 80% capacity utilization. The progress of underground mine development work at Rampura Agucha mine and greenfield Kayar mine is also as per schedule. With the Rajasthan Zinc smelters fully ramped-up and operating at higher efficiencies, the company suspended operations at the 35-year old Vizag Zinc smelter during the quarter, which had a relatively higher cost and contributed only 28,000 tonnes of Zinc production during 2011-12. Post the 150 mega watt (MW), expansion in wind power concluded during the year, the wind power generation capacity stands at around 274 MW making Hindustan Zinc one of the largest wind power producers in the country.

Going into FY13, mined metal production is expected to be slightly better than FY12. Production in H1FY13 is expected to be marginally lower than H1FY12, but the management is confident that it will be more than make up in H2FY13. SK mine is expected to deliver volumes near its capacity of 2 mtpa in FY13. Total integrated Silver production is projected to be around 350 tonnes in FY13. At the current price, the stock is trading at a multiple of 1.7 times our estimated FY14 book value of the company. We maintain our positive view on the company.

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