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Hindustan Zinc: The other income boost
Jul 23, 2012

Hindustan Zinc has announced its June quarter results. The company has reported a 3.5% YoY decline in net sales and 5.8% YoY increase in net profits for the quarter ended June 2012. Here is our analysis of the results.

Performance summary
  • Topline declined by 3.5% YoY during the quarter due to lower sales of zinc as well as lower prices of lead, zinc and silver.
  • Operating profits declined by 10% YoY during the quarter on account of high cost of production. Operating margins also declined by 4%.
  • Net profits increased by 5.8% YoY on account of higher other income and lower taxes. Net profit margins increased by 5%.
  • Other income grows by 59.7% YoY.

Financial performance: A snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 28,471 27,477 -3.5%
Expenditure 12,589 13,192 4.8%
Operating profit (EBDITA) 15,882 14,286 -10.0%
Operating profit margin (%) 55.8% 52.0%  
Other income 3,597 5,743 59.7%
Interest (net) 66 129 94.0%
Depreciation 1,345 1,734 28.9%
Profit before tax 18,066 18,166 0.6%
Exceptional Item 44 - -100.0%
Tax 3,073 2,353 -23.4%
Profit after tax/(loss) 14,949 15,813 5.8%
Net profit margin (%) 52.5% 57.6%  
No. of shares (m) - 8,451  
Diluted earnings per share (Rs)   6.6  
P/E ratio (x)*   18.2  
* On a trailing 12 months basis

What has driven performance in 1QFY13?
  • During the quarter, net sales declined by 3.5% YoY. The positive impact of higher Lead-Silver volumes and Rupee depreciation was offset by lower London Metal Exchange (LME) prices for zinc and lead and London Bullion Market Association (LBMA) prices for silver. Zinc LME prices declined by 14% YoY and lead LME prices declined by 23% YoY. This manifested into 14% YoY decline in sales of zinc. However silver and lead continued to shine for the company. Silver sales increased by 26% YoY, while lead sales increased by 34% YoY. The company also sold sulphuric acid of 300 kt with an average realisation of Rs 2,752 per tonne during the quarter.

  • Hindustan Zinc's volumes in 1QFY13 were muted with zinc production declining 15% QoQ and 17% YoY at 161 kt. Though lead and silver production declined 16% and 7% QoQ, it was up 94% and 74% YoY, respectively, due to ramp up of Sindesar Khurd (SK) mine and stabilisation of the new lead and silver refining capacities. Mined metal output at SK mine increased by around 60% from a year ago, offsetting lower output from Rampura Agucha mine.

    Cost break-up
    (Rs m) 1QFY12 1QFY13 Change
    Raw Materials 1,325 618 -53.4%
    % of sales 4.7% 2.2%  
    Stores and spares 2,365 2,714 14.8%
    % of sales 8.3% 9.9%  
    Power & fuel 2,953 2,715 -8.1%
    % of sales 10.4% 9.9%  
    Mining royalty 1,936 2,044 5.6%
    % of sales 6.8% 7.4%  
    Other mining & manufacturing expenses 1,900 2,580 35.8%
    % of sales 6.7% 9.4%  
    Employee cost 1,274 1,492 17.1%
    % of sales 4.5% 5.4%  
    Other Expenditure 836 1029 23.0%
    % of sales 2.9% 3.7%  

  • Operating profits declined by 10% YoY. This was due to 16.9% increase in cost of production of zinc. The increase was due to higher prices of consumables due to Rupee depreciation and lower metal production. Operating margins declined by 4% YoY. However margin impact was limited on account of silver volumes (which have ramped up as expected) as well as 3% contribution from wind energy (1% last year).

  • Net profits increased by 5.8% YoY. This was due to higher other income and lower taxes. Other income was up by 59.7% YoY due to higher yield on investment and also MTM gain of Rs 1.2 bn due to 50 bps drop in interest rates in April 2012. Average yield on investment was 9.5%. Tax rate dipped to 13% (versus 17% in 1QFY12 and 24% in 4QFY12) benefitting from capex commissioned last year.

What to expect?
As guided by the management, H1FY13 volume will be lower than H1FY12. Production along with realization is expected to be lower in 2QFY13 as well. Effective tax rate for the full year is expected to be in the 15 to 19% range. The capex continues to be in line with guidance for the underground mine development at Rampura Agucha and Kayar mine development. The developmental ore from Rampura Agucha underground mine and Kayar mine is expected in 2HFY13 while commercial production from both these mines will start next year. As at 30 June 2012, the company had cash and cash equivalents of Rs 194 bn which includes Rs 105 bn in debt mutual funds, Rs15.4 bn in bonds and Rs73.1 bn in fixed deposits with banks. The company has also received environmental clearance at Zawar mines and is expecting the forest clearance to come through very soon.

With ramp-up in volumes expected in H2FY13, depreciated Rupee masking the fall in zinc prices, as well as reasonable support from silver and wind energy, we don't see significant downside risks to our long term estimates. 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 our positive view on the company.

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