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Hindustan Zinc: A record quarter - Views on News from Equitymaster
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Hindustan Zinc: A record quarter
Apr 25, 2013

Hindustan Zinc has announced its March quarter results. The company has reported 25% growth in topline and 53% YoY growth in net profits for the quarter ended March 2013. Here is our analysis of the results.

Performance summary
  • Topline grows by 25% YoY during the quarter, led by 25% growth in Zinc sales
  • Operating margins expand by 1.2% with profits going up by 27% YoY
  • Bottomline grows by 53% YoY on the back of strong operating performance and significant fall in tax outgo
  • Profits for the full year go up 25% YoY on the back of an 11% growth in topline

(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 31,350 39,087 24.7% 114,053 126,998 11.4%
Expenditure 14,760 17,927 21.5% 53,359 62,182 16.5%
Operating profit (EBDITA) 16,590 21,160 27.5% 60,695 64,816 6.8%
EBDITA margin (%) 52.9% 54.1%   53.2% 51.0%  
Other income 3,717 4,118 10.8% 15,428 20,322 31.7%
Interest (net) (69) 108 -256.1% 140 291 108.6%
Depreciation 1,671 1,219 -27.0% 6,107 6,470 6.0%
Profit before tax 18,706 23,951 28.0% 69,877 78,377 12.2%
Extraordinary income/(expense) (84) (175)   (431) (175)  
Tax 4,494 2,117 -52.9% 14,185 9,206 -35.1%
Profit after tax/(loss) 14,128 21,658 53.3% 55,260 68,995 24.9%
Net profit margin (%) 45.1% 55.4%   48.5% 54.3%  
No. of shares (m) 4,225.3 4,225.3   4,225.3 4,225.3  
Diluted earnings per share (Rs)*         16.3  
Price to earnings ratio (x)*         7.3  
(* on trailing twelve months earnings)

What has driven performance in 4QFY13?
  • Net sales increased by 24.7% YoY and 23% QoQ. Volume across the product categories improved satisfactorily with zinc sales volume improving by 7% to 182 kt and lead sales volume by 8% to 33 kt for 4QFY13. Silver volume though on QoQ basis fell by 5% to 107 tonne, it more than doubled on YoY basis. The company also sold 61 kt (worth Rs 4.8 bn) of zinc MIC during the quarter. Higher volume was aided by the rise in LMEs. Zinc and lead LMEs during the quarter rose 4.4% and 4.6% to USD $2033/ tonne and USD $2301/tonne respectively.

  • Mine production increased 15.6% YoY to 260 kt in 4QFY13 and 5% to 870 kt in FY13 due to ramp-up of mining in the second half. Refined zinc production declined 5% YoY to 182 kt in 4QFY13 and 11% to 759 kt in FY13 due to lower mine production in 1HFY13 and shutdown of Vizag smelter towards the end of FY12. Integrated silver production increased 20% YoY to 100 tons in 4QFY13 and 36% to 322 kt in FY13. Cost of production was stagnant QoQ at USD $823/tonne (Rs 44,900/tonne) and was USD $19/tonne lower than the cost of production in 1HFY13.

    Cost break-up...
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw Materials 993 2,403 142.0% 3,121 6,805 118.0%
       % of sales 3.2% 6.1%   2.7% 5.4%  
    Stores and spares 2,788 3,160 13.3% 10,467  11,751 12.3%
       % of sales 8.9% 8.1%   9.2% 9.3%  
    Power & fuel 3,225 2,763 -14.3% 12,278  10,705 -12.8%
       % of sales 10.3% 7.1%   10.8% 8.4%  
    Mining royalty 2,291 2,440 6.5% 8,379 9,199 9.8%
       % of sales 7.3% 6.2%   7.3% 7.2%  
    Other mining & manufacturing expenses 2,728 3,351 22.8% 9,561  12,042 25.9%
       % of sales 8.7% 8.6%   8.4% 9.5%  
    Employee cost 1,445 1,768 22.4% 5,346 6,499 21.6%
       % of sales 4.6% 4.5%   4.7% 5.1%  
    Other Expenditure 1,290 2,042 58.3% 4,206 5,181 23.2%
       % of sales 4.1% 5.2%   3.7% 4.1%  

  • Operating profits of the company increased by 27.5% YoY. Zinc cost of production (excluding royalty) rose 8% YoY to Rs 44,900/tonne (USD $829) in 3QFY13 (flat QoQ). FY13 cost of production rose 13% YoY to Rs 45,500 impacted by lower volumes; higher strip ratio at Rampura Agucha (RA) and lower by-product credits (sulphuric acid prices fell). The company benefited from lower coal prices (65% coal is imported). Improved operational efficiencies and higher volumes should help lower costs in FY14.

  • Net profits increased by 53.3% YoY and 34.3% QoQ. Profits surged on 1) higher realizations - lead LME and rupee depreciation; 2) strong silver volumes, (up 41% YoY); 3) concentrate sales (61kt); 4) lower tax rate. Tax rate at 8.8% was lower due to tax benefits on account of higher integrated silver production, higher profitability in the Power segment, phase-II wind power expansion and higher share of tax-efficient investment income. Tax rate is likely to remain low at 14% in FY14, as well. Depreciation declined 31% QoQ to Rs1.2 bn due to write-back of depreciation on account of sale of certain idle assets at acquisition cost. Other income was lower on account of MTM losses of Rs 740 m on investments as against Rs 410 m gain in 3QFY13. Cash and equivalents increased by Rs 22 bn QoQ to Rs 215 bn.

  • Hindustan Zinc's Board of Directors has recommended a final dividend of 75% (Rs 1.50 per share on equity share of Rs 2.00 each). The total dividend for FY13 is 155% (Rs 3.10) against FY12 dividend of 120% and is the highest ever dividend proposed by the company.

What to expect?

Hindustan Zinc expects zinc demand to grow by double digits in India whereas lead demand is expected to grow by 6%. Hindustan Zinc has indicated that its cost of production for zinc will remain flat YoY at Rs 44500 per tonne. The cost of production will remain flat as its expects lower fixed cost due to full ramp up of Zawar mines and higher operating leverage due to increase in volumes.

It expects the capex of USD $250-300 m in FY14 on growth capex and Rs 2.5 -3 bn on maintenance capex. The company has secured all the approvals for the Zawar mines and expects 1.2 m tonne output in FY14. It will have an output divided in equal half between underground and open cast mining.

Consequent to the fall in base metal prices and the hangover of stake sale by the government, the stock of Hindustan Zinc fell by 27% from its 52-week high of Rs 147 on December 18, 2012, to its 52-week low of Rs 107 on April 17, 2013. While the stock thereafter has recovered to Rs 122 levels, the company's performance in the fourth quarter should allay fears on the earnings front. At the current price, the stock is trading at a multiple of 1.9 times our estimated FY15 book value of the company. We maintain a Hold 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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