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Hindustan Zinc: Record mined metal production - Views on News from Equitymaster

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Hindustan Zinc: Record mined metal production
May 5, 2015

Hindustan Zinc has announced its March quarter results. The company has reported 13.3% YoY increase in net sales while profits have grown by 6.2% YoY for the quarter ended March 2015. Here is our analysis of the results.

Performance summary
  • Topline grows by 13.3% YoY during the quarter, driven by higher zinc sales partly offset by lower lead and silver prices & silver volumes.
  • Operating profits increased 12.7% YoY due to strong topline growth.
  • Bottomline increases at a lower rate of 6.2% YoY due to significantly higher tax outgo
  • The board recommended a dividend of Rs 4.4 per share for the fiscal under consideration.

Financial snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Sales 36,427 41,257 13.3% 136,360 147,884 8.5%
Expenditure 18,875 21,473 13.8% 67,362 73,688 9.4%
Operating profit (EBDITA) 17,552 19,784 12.7% 68,999 74,196 7.5%
Operating profit margin (%) 48.2% 48.0%   50.6% 50.2%  
Other income 5,887 5,949 1.1% 18,994 28,211 48.5%
Interest (net) 203 138 -31.8% 449 235 -47.7%
Depreciation 2,041 268 -86.9% 7,846 6,442 -17.9%
Profit before tax 21,195 25,327 19.5% 79,697 95,729 20.1%
Exceptional Item - - NA - 28 NA
Tax 2,383 5,353 124.6% 10,651 13,921 30.7%
Profit after tax/(loss) 18,812 19,974 6.2% 69,046 81,780 18.4%
Net profit margin (%) 51.6% 48.4%   50.6% 55.3%  
No. of shares (m)         4,225  
Diluted earnings per share (Rs)         19.4  
P/E ratio (x)*         8.9  
* On a trailing 12 months basis

What has driven performance in 4QFY15?
  • Net sales of Hindustan Zinc (HZL) increased by 13.3% YoY. For 4QFY15, mined metal production stood at 269,000 MT, higher by 34% YoY (200,000 MT in 4QFY14). The increase in production was in line with expectations whereby management anticipated a pick-up in volumes from Rampura Agucha and Sindesar Khurd mines during the course of the year. Refined zinc production (integrated) volumes increased 21% YoY to 217,000 MT while refined silver production (integrated) volumes increased by 9% YoY to 74,000 MT.

  • The company's cost of zinc production (before royalty) declined by 7% YoY to Rs 50,831/ton due to lower diesel cost partly offset by higher cost of landed coal and increased employee expenses on account of long term wage agreement signed during the year.

  • EBITDA improved by 12.7% YoY due to strong sales growth.

  • Net profits increased by 6.2% YoY due to fall in interest and depreciation expenses. Change in the estimated useful life of assets lowered the depreciation charge by Rs 1.8 bn for the quarter and year ended FY15. However, tax rate increased to 21.1% in 4QFY15 from 11.2% in 4QFY14 thereby curtailing profit growth to an extent.
What to expect?

At the current price of Rs 173, the stock is trading at 8.9 times its trailing twelve month earnings. As expected, the production figures have improved in the second half of the year as more ore got extracted. In fact, the production boost was so material from the expansion at Sindesar Khurd and Rampura Agucha mines that the company set forth an annual production record of 887,000 MT during FY15. Further, the shaft sinking project at Sindesar Khurd is ahead of schedule which is expected to give further boost to production in future. Total reserves at the end of FY15 stood at 375.1 MT and the overall mine life remains in excess of 25 years.

Lastly, the new mines and minerals bill that was notified towards the end of the year is likely to bring in greater transparency. However, the new bill also proposes to make a contribution towards district mineral foundation (DMF) for the benefit of displaced people. This is likely to impact the industry in a negative way. 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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