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Hindustan Zinc: Subdued performance - Views on News from Equitymaster

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Hindustan Zinc: Subdued performance
Apr 28, 2014

Hindustan Zinc has announced its March quarter and full year FY14 results. The company has reported 6.8% YoY decline in net sales and 13% YoY fall in net profits for the quarter ended March 2014. Here is our analysis of the results.

Performance summary
  • Topline declines by 6.8% YoY during the quarter, due to no sale of MIC (metal-in-concentrate) and fall in sales volumes of zinc and silver. During FY14, net sales grow by 7.4% YoY.
  • Operating margins fell by as much as 6.1% with decline in operating profits of 17.3% YoY. Operating costs increase on account of lower mined metal production and 14% depreciation in
  • rupee dollar rate. For full year FY14, operating margins were flat at 51.1%
  • Bottomline declines by 13.1% YoY, while net profit margins decline by 3.8% YoY.
  • However, other income grows by 5.7% YoY.
  • For the full year FY14, the company posted a 7.4% YoY increase in net sales while net profits were marginally higher by 0.1% YoY.
  • Recommends final dividend of Rs 1.9 per share

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 39,087 36,427 -6.8% 126,998  136,360 7.4%
Expenditure 17,862 18,875 5.7% 61,915 66,745 7.8%
Operating profit (EBDITA) 21,225 17,552 -17.3% 65,084 69,615 7.0%
Operating profit margin (%) 54.3% 48.2%   51.2% 51.1%  
Other income 4010 5887 46.8% 20032 18994 -5.2%
Interest (net) 66 203 207.8% 269 449 67.3%
Depreciation 1219 2041 67.5% 6470 7846 21.3%
Profit before tax 23951 21195 -11.5% 78377 80314 2.5%
Exceptional Item 175 0 -100.0% 175 617 251.8%
Tax 2117 2383 12.6% 9206 10651 15.7%
Profit after tax/(loss) 21658 18812 -13.1% 68995 69046 0.1%
Net profit margin (%) 55.4% 51.6%   54.3% 50.6%  
No. of shares (m)         4,225.3  
Diluted earnings per share (Rs)         16.3  
P/E ratio (x)*         8.0  

What has driven performance in FY14?
  • In FY14, Hindustan Zinc's (HZL) net sales increased by 7.4% YoY led by higher sales volumes of zinc and lead. Overall mined metal production was marginally higher by 1% YoY to 880 thousand tonnes (it declined by 23% YoY in 4QFY14) as a result of lower production during the second half of FY14. Mining activity only marginally improved due to slower ramp up of underground mining projects and changes in mining sequence.

  • Refined metal production (integrated) improved on account of operational efficiency and greater availability of smelters. Refined zinc, lead and silver production in FY14 were higher by 13%, 10% and 4% YoY respectively.

    Cost break-up...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw Materials 2,337 2,508 7.3% 6,538 3,461 -47.1%
    % of of sales 6.0% 6.9%   5.1% 2.5%  
    Stores and spares 3,160 3,268 3.4% 11,751 13,336 13.5%
    % of of sales 8.1% 9.0%   9.3% 9.8%  
    Power & fuel 2,763 2,914 5.5% 10,705 11,551 7.9%
    % of of sales 7.1% 8.0%   8.4% 8.5%  
    Mining royalty 2,440 2,498 2.4% 9,199 10,273 11.7%
    % of of sales 6.2% 6.9%   7.2% 7.5%  
    Other mining & manufacturing expenses 3,351 4,260 27.1% 12,042 15,570 29.3%
    % of of sales 8.6% 11.7%   9.5% 11.4%  
    Employee cost 1,768 1,663 -5.9% 6,499 6,801 4.6%
    % of of sales 4.5% 4.6%   5.1% 5.0%  
    Other Expenditure 2,042 1,763 -13.6% 5,181 5,754 11.1%
    % of sales 5.2% 4.8%   4.1% 4.2%  

  • The company's zinc production costs expanded by 12% YoY to Rs 51,054 per tonne as a result of 11% rupee depreciation and higher mine development and diesel costs. In dollar terms zinc costs increased by 1% YoY. However, total expenditure increased by 7.8% YoY due to slower growth in staff costs (up by 4.6%) and overall decline in the raw material costs.

  • EBITDA increased 7% YoY on account of higher integrated metal production, rupee depreciation and lower metal costs. Net profit was flat over previous year despite higher EBITDA as a result of increased interest costs by 67% YoY, depreciation by 21% YoY and decline in other income by 5% YoY.
What to expect?
Hindustan Zinc's total mined metal production was lower than planned of 900 kt (thousand tonnes) to 800 kt on account of delay in ramp up activities in the ongoing projects and development of new mines. The company believes majority of mined production to continue coming from Rampura Agucha mine. In FY15, the company expects mined metal and integrated refined metals to be marginally higher than from FY14. The cost of production is expected to remain flat.

Development of mine has been progressing well, total underground mine development increased by 75%. The Kayad and Rampura mines commercialized and ramp up of the operations during the year despite initial difficulties.

Project capex were in line with the guidance, the company expects capex of US $250 m in FY15.

At the current prices of Rs 130 the stock is trading at 8 times its FY14 earnings. Although 4QFY14 performance was negative, we expect robust growth in volumes of zinc, lead and silver in FY15 and FY16 led by ramp up of new mine developments. We maintain our 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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