HZinc: Lead, silver volumes boost profits - Views on News from Equitymaster

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HZinc: Lead, silver volumes boost profits

Oct 22, 2012

Hindustan Zinc has announced its September quarter results. The company has reported 8.7% YoY increase in net sales and 14.5% YoY increase in net profits for the quarter ended September 2012. Here is our analysis of the results.

Performance summary
  • Topline increased by 8.7% YoY during the quarter on back of higher volumes of lead and silver.
  • Operating profits of the company remained flat (up 0.2% YoY) on account of high excavation costs and rupee depreciation. Operating margins also declined by 4.2%.
  • Net profits increased by 14.5% YoY on account of higher other income and lower taxes. Net profit margins increased by 2.7%.
  • Other income grows by 32.1% YoY.
  • For the half year ended September 2012, the company posted a 2.4% YoY increase in net sales and 9.9% YoY increase in net profits.
  • The company has declared an interim dividend of 80% i.e Rs 1.6 per share on equity share of Rs 2.0 each, as compared to an interim dividend of Rs 1.50 per share last year.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 26,368 28,655 8.7% 54,839 56,132 2.4%
Expenditure 11,960 14,224 18.9% 24,549 27,415 11.7%
Operating profit (EBDITA) 14,408 14,431 0.2% 30,290 28,717 -5.2%
Operating profit margin (%) 54.6% 50.4%   55.2% 51.2%  
Other income 4,087 5,398 32.1% 7,684 11,141 45.0%
Interest (net) 92 (21) -122.8% 158 108 -31.7%
Depreciation 1,464 1,746 19.3% 2,809 3,480 23.9%
Profit before tax 16,940 18,104 6.9% 35,007 36,270 3.6%
Exceptional Item 239 -   283 -  
Tax 3,255 2,706 -16.9% 6,328 5,059 -20.1%
Profit after tax/(loss) 13,447 15,398 14.5% 28,396 31,211 9.9%
Net profit margin (%) 51.0% 53.7%   51.8% 55.6%  
No. of shares (m)         8451  
Diluted earnings per share (Rs)         6.9  
P/E ratio (x)*         19.6  
* On a trailing 12 months basis

What has driven performance in 2QFY13?
  • During the quarter, net sales increased by 8.7% 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 15% YoY and lead LME prices declined by 20% YoY. This manifested into 9% YoY decline in sales of zinc. However silver and lead continued to shine for the company. Silver sales increased by 82% YoY, while lead sales increased by 96% YoY.

  • Refined lead production went up by 60%, refined silver production increased by 86% during the period. However, the positive impact of higher lead-silver volumes and rupee depreciation was offset by lower zinc volumes, lower prices of zinc, lead and silver in the second quarter and the first half of FY13. Sulphuric acid production stood at 278,000 tonnes with slightly better realization. Increase in silver volume was mainly due to higher contribution from custom smelting, as integrated silver production stood at 80 tonne. The company during the quarter had imported 15 kt of concentrates, which was rich in silver content.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw Materials (390) 1,230 NA 935 1,848 97.6%
    % of sales -1.5% 4.3%   1.7% 3.3%  
    Stores and spares 2,624 2,884 9.9% 4,989 5,598 12.2%
    % of sales 10.0% 10.1%   9.1% 10.0%  
    Power & fuel 2,924 2,618 -10.5% 5,877 5,333 -9.3%
    % of sales 11.1% 9.1%   10.7% 9.5%  
    Mining royalty 2147 2028 -5.5% 4082 4072 -0.2%
    % of sales 8.1% 7.1%   7.4% 7.3%  
    Other mining & manufacturing expenses 2278 2843 24.8% 4179 4072 -2.5%
    % of sales 8.6% 9.9%   7.6% 7.3%  
    Employee cost 1290 1547 19.9% 2565 3038 18.5%
    % of sales 4.9% 5.4%   4.7% 5.4%  
    Other Expenditure 1086 1075 -1.0% 1923 2104 9.4%
    % of sales 4.1% 3.8%   3.5% 3.7%  

  • Operating profits of the company remained flat for the quarter. The cost of production (CoP) of zinc stood at Rs 46,750 per tonne (USD $844), against Rs 45,759 per tonne (USD $844) for 1QFY13. This looks good given the lower volume of zinc and lead and ongoing underground mining project. Operating margins declined by 4.2% YoY.

  • Net profits increased by 14.5% YoY. This was due to higher other income and lower taxes. Bottomline was again boosted by the higher other income of Rs 5.4 bn, backed by higher yield (post tax 9%) and higher interest rate. Going ahead however, a slight reduction is likely due to maturity of high yielding investments and also due to expected fall in interest rate. Tax rate for the quarter remained lower at 15% and is likely to remain so for full FY13 mainly due to benefits from wind power, captive power plant and exemption on refineries in Uttarakhand.

What to expect?
The management is confident of delivering better performance in 2HFY13 due to better progress of project activities. The zinc mined metal production is likely to surpass 400 kt with silver and lead to go up further. The company expects lower zinc CoP in second half of the current financial year. Full year capex is seen at Rs 16 bn. 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. Cash and cash equivalents was down on a QoQ basis due to importing of concentrate, final dividend given during the quarter and higher installment of advance tax payment.

With ramp-up in volumes expected in 2HFY13, 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 1.7 times our estimated FY15 book value of the company. We maintain a Hold view on the stock of the company.

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