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Hindustan Zinc: Rising costs pinch bottomline
Oct 21, 2010

Hindustan Zinc declared its 2QFY11 results. The company has reported 21% YoY growth in sales while its net profits have grown 1% year on year. Here is our analysis of the results.

Performance summary
  • Net sales grow 21% YoY in 2QFY11, led by a growth in both prices and volumes.
  • During 2QFY11, the companyís operating margins contracted by 8.2% YoY owing to almost all operating cost heads seeing a rise (as a percentage of sales).
  • Net profits grew by just 1% YoY during 2QFY11. This is mainly on account of HZLís margin contraction at the operating level.


Financial performance: A snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 17,896 21,629 21% 33,018 41,137 24.6%
Expenditure 7,428 10,758 45% 14,871 20,274 36.3%
Operating profit (EBDITA) 10,468 10,871 4% 18,146 20,863 15.0%
Operating profit margin (%) 58.5% 50.3%   55.0% 50.7%  
Other income 1,824 2,222 22% 3,770 4,032 6.9%
Interest 54 (5) -109% 86 60 -29.6%
Depreciation 771 1,158 50% 1,519 2,281 50.2%
Exceptional Items - (212)   - (212)  
Profit before tax 11,467 11,728 2% 20,312 22,342 10.0%
Tax 2,118 2,241 6% 3,774 3,946 4.5%
Profit after tax/(loss) 9,350 9,487 1% 16,538 18,396 11.2%
Net profit margin (%) 52.2% 43.9%   50.1% 44.7%  
No. of shares       422.5 422.5  
Diluted earnings per share (Rs)         100.1  
P/E ratio (x)         12.3  

What has driven performance in 2QFY11?
  • Hindustan Zincís topline grew by 21% YoY in 2QFY11, led by a growth in average prices of zinc and lead as well as an increase in volumes. During the quarter, production of refined zinc-lead metal stood at about 192,400 tonnes, which was led by a 25% YoY rise in zinc production, and 20% YoY rise in the production of lead. Silver production on the other hand saw a growth of 9% YoY. Average prices of zinc stood at US$ 2,013 per tonne, compared with US$ 1,757 during 2QFY10. Average price of lead stood at US$ 2,032 per tonne, compared to US$ 1,925 per tonne in 2QFY10. Thus, the increase in both volumes as well as prices during the quarter came together to help the company post a 21% YoY growth in topline.

  • HZL recorded an 8.2% YoY contraction in operating margins during 2QFY11. This was largely due to increase in most of its major cost heads. An increase in coke and coal costs, increase in commodity prices and higher stripping costs at mines all contributed to bring down the companyís operating margins.

  • The companyís bottomline grew by just 1% YoY during 2QFY11. This was mainly on account of its poor performance at the operating level in terms of margin contraction. A steep rise in depreciation expenses also played spoilsport. Further, the exceptional item during the current quarter pertains to the amount the company has incurred on account of a voluntary retirement scheme that the company has put into effect. This too contributed to the poor show on the bottomline front.

What to expect?
As per the company, the 100 ktpa lead smelter at the Dariba Smelting Complex is expected to be commissioned by 3QFY11. Primary mine development activity at Sindesar Khurd Mine (SKM) project is also on schedule. The new 1.50 mtpa mill at SKM is expected to commence production by end of Q3 FY11. The company also remains on track to achieve a capacity of 500 tonnes of silver by FY13. At the current price of Rs 1,230, the stock is trading at a multiple of 2.1 times our estimated FY12 book value for the company. We retain our positive view on the company.

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