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HZinc: Higher sales volumes boost profits
Jul 20, 2013

Hindustan Zinc has announced its June quarter results. The company has reported 8.6% YoY increase in net sales and 5% YoY increase in net profits for the quarter ended June 2013. Here is our analysis of the results.

Performance summary
  • Topline grows by 8.6% YoY during the quarter, due to higher mined metal production which increased by over 27%.
  • Operating margins declined by 1.2% with operating profits going up by 5.9% YoY
  • Bottomline grows by 5% YoY as the impact of higher sales and output was partially offset by lower metal prices.
  • Net profit margins declined by 2% YoY.

Consolidated financial snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 27,477 29,842 8.6%
Expenditure 13,287 14,811 11.5%
Operating profit (EBDITA) 14,191 15,031 5.9%
Operating profit margin (%) 51.6% 50.4%  
Other income 5,838 6,203 6.2%
Interest (net) 129 109 -15.1%
Depreciation 1,734 1,843 6.3%
Profit before tax 18,166 19,281 6.1%
Exceptional Item - 5  
Tax 2,353 2,671 13.5%
Profit after tax/(loss) 15,813 16,605 5.0%
Net profit margin (%) 57.6% 55.6%  
No. of shares (m)   4,225  
Diluted earnings per share (Rs)   17  
P/E ratio (x)*   6  
* On a trailing 12 months basis

What has driven performance in 1QFY14?
  • Net sales increased by 8.6% YoY mainly due to increased sales volumes of zinc and silver. Refined zinc production volumes increased 10.0% YoY to 173 kt and refined silver production volumes grew 31.0% YoY to 96 kt due to higher production from Sindesur Khurd mine and new Dariba lead and silver capacities.

  • The increase in mined metal (+27% YoY, - 9% QoQ) was mainly led by Rampura Agucha mine after mining stabilized at lower stripping ratios. However, full benefit of higher mined metal was not realized as concentrate ended up in inventory due to plant shutdowns at downstream units, i.e. zinc roaster and lead smelter. Hindustan Zinc's concentrate inventory increased by 22 kt during the quarter to 54 kt. Due to smelter shutdowns, refined metal production declined by (1) 4% QoQ to 174 kt (+11% YoY) of zinc, (2) 6% QoQ to 33 kt (+6% YoY) of lead and (3) 11% QoQ to 96 tons (net of captive consumption) of silver. Metal sales during 1QFY14 were 171 kt of zinc, 30 kt of lead and 92 tons of silver.

    Cost break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Raw Materials 618 (709) NA
    % of sales 2.2% -2.4%  
    Stores and spares 2,714 3,265 20.3%
    % of sales 9.9% 10.9%  
    Power & fuel 2,715 2,649 -2.4%
    % of sales 9.9% 8.9%  
    Mining royalty 2,044 2,530 23.8%
    % of sales 7.4% 8.5%  
    Other mining & manufacturing expenses 2,580 3,779 46.5%
    % of sales 9.4% 12.7%  
    Employee cost 1,492 1,781 19.4%
    % of sales 5.4% 6.0%  
    Other Expenditure 1124 1518 35.0%
    % of sales 4.1% 5.1%  

  • Operating profits of the company increased by 5.9% YoY. Zinc cost of production (COP) was reported at Rs 46,800/ton (US $836/ton) on ex-royalty basis. COP increased by 2% YoY. Coal costs were lower during the quarter. The cost of production increased primarily due to lower sulphuric acid credits and higher excavation costs, although these were partially offset by a lower price of coal, lower specific coal consumption and benefits accruing out of higher volumes.

  • Net profits increased by 5% YoY. Decline in commodity prices hurt profitability of silver the most with 40% QoQ decline in EBIT to Rs 2.7 bn (23% YoY) on the back of 22% sequential decline in realizations. However, effective sequential decline in zinc-lead prices by 6-8% (in Rupee terms) was cushioned by higher premiums.

What to expect?
At current levels of US $1,900/tonne, zinc prices stand near marginal cost of production for several zinc producers globally. Hence, we believe that the probability of a further decline in zinc prices from the current levels remains muted. Further, over the next 3-5 years, several zinc mines are expected to be exhausted; hence, production is likely to suffer. This should support zinc prices over the medium term in our view.

Since the expansion at Sindesur Khurd is complete, Hindustan Zinc has commenced work at its underground Kayad mine, which has 11m tonne of high-grade reserves. The company expects to increase its capacity from 1 m tonne to 5 m tonne over the coming five years. Moreover, given the cash-rich balance sheet, Hindustan Zinc is actively exploring greenfield projects through prospecting licenses and mining lease projects across different states.

At the current price of Rs. 104, the stock is trading at a multiple of 0.9 times our estimated FY16 book value of the company. We maintain a 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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