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Hindustan Zinc: Muted volume growth - Views on News from Equitymaster
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Hindustan Zinc: Muted volume growth
Aug 1, 2014

Hindustan Zinc has announced its June quarter results. The company has reported 0.8% YoY increase in net sales while profits have declined by 2.6% YoY for the quarter ended June 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 0.8% YoY during the quarter, driven by higher zinc prices and rupee depreciation, partly offset by lower volumes. A 22% YoY decline in silver revenues dragged sales growth.
  • Operating profits declined 9.8% YoY due to lower volumes and higher production cost. The cost of production for zinc (without royalty) was up 29% YoY and 20% YoY in Rupee and Dollar terms respectively.
  • Bottomline declines by 2.6% YoY. The fall at the net level was partially cushioned by a 15.7% YoY growth in other income.

Financial snapshot
(Rs m) 1QFY14 1QFY15 Change
Sales 29,842 30,072 0.8%
Expenditure 14,854 16,548 11.4%
Operating profit (EBDITA) 14,988 13,524 -9.8%
Operating profit margin (%) 50.2% 45.0%  
Other income 6,203 7,174 15.7%
Interest (net) 67 76 14.1%
Depreciation 1,843 2,023 9.7%
Profit before tax 19,281 18,599 -3.5%
Exceptional Item 5 - -100.0%
Tax 2,671 2,422 -9.3%
Profit after tax/(loss) 16,605 16,177 -2.6%
Net profit margin (%) 55.6% 53.8%  
No. of shares (m)   4225.1  
Diluted earnings per share (Rs)   3.8  
P/E ratio (x)*   10.0  
* On a trailing 12 months basis

What has driven performance in 1QFY15?
  • Net sales of Hindustan Zinc (HZL) increased by just 0.8% YoY led by lower volumes of zinc, lead and silver. Mined metal production was at 163,131 tonnes in 1QFY15 lower by 31.4% YoY (237,825 tonnes in 1QFY14). The decrease is predominantly because the company excavated more waste than ore in 1QFY15. Refined zinc production (integrated) volumes declined 20% YoY to 139,000 MT while refined silver production (integrated) volumes declined by 28% YoY to 56,000 MT. The poor show on the volume front in 1QFY15 is expected to persist for the next quarter as well. However, volumes are expected to pick up in second half of the year as the proportion of waste excavation shall decline.

    Cost break-up
    (Rs m) 1QFY14 1QFY15 Change
    Raw Materials (inclusive of inventory changes) -633 2752 NA
    % of sales -2.1% 9.2%  
    Stores and spares 3265 2962 -9.3%
    % of sales 10.9% 9.8%  
    Power & fuel 2649 2276 -14.0%
    % of sales 8.9% 7.6%  
    Mining royalty 2530 1987 -21.5%
    % of sales 8.5% 6.6%  
    Other mining & manufacturing expenses 3779 3665 -3.0%
    % of sales 12.7% 12.2%  
    Employee cost 1781 1617 -9.2%
    % of sales 6.0% 5.4%  
    Other Expenditure 1484 1288 -13.2%
    % of sales 5.0% 4.3%  

  • The company's cost of zinc production (before royalty) rose by 29% YoY to Rs 60,093/tonne due to lower production which inflated cost, rupee depreciation (as most inputs costs are related to international prices), and plant shutdowns.

  • EBITDA declined by 9.8% YoY due to higher raw material costs amidst higher cost of zinc production. Except for material cost all other cost heads registered a decline on a YoY basis.

  • Net profits declined by 2.6% YoY. The fall at the net level was partially cushioned by 15.7% YoY growth in other income. However, depreciation and interest expenses increased by 9.7% YoY and 14.1% YoY respectively, leading to an eventual de-growth in profits.
What to expect?
During the quarter volumes were down as the company excavated more waste than ore. However, the situation is likely to improve in the second half of the year as more ore gets extracted. Also, during the quarter, total mine development increased by 15%. Both the Rampura Agucha and Sindesar Khurd projects are progressing well.

At the current price of Rs 163 the stock is trading at 10 times its trailing twelve month earnings. With mine production expected to get a boost in second half volumes are expected to remain healthy. Even the LME prices for zinc and lead registered improvement in 1QFY15. And may remain in the upward trajectory in the near future. As such, sales growth is expected to remain healthy. Nonetheless, the recent appreciation in stock price leaves little upside from current levels. As a result, we maintain our HOLD view on the stock after rolling forward our estimates to FY17. Lastly, 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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