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Hind Zinc: Profits increase on higher volumes
Oct 23, 2013

Hindustan Zinc has announced its September quarter results. The company has reported 24.2% YoY increase in net sales and 6.5% YoY increase in net profits for the quarter ended September 2013. Here is our analysis of the results.

Performance summary
  • Topline grows by 24.2% YoY during the quarter, due to higher mined metal production which increased by 16%.
  • Operating margins increased by 1.6% with operating profits going up by 28.2% YoY
  • Bottomline grows by 6.5% YoY as the impact of higher sales and output was partially offset by lower silver prices. Net profit margins declined by 7.6% YoY.
  • Other income declined by 48.8% YoY due to mark-to-market losses on investments during the quarter.
  • For the half year ended September 2013, the company posted a 16.6% YoY increase in net sales and 5.8% 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.

Financial snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 28,655 35,591 24.2% 56,132 65,433 16.6%
Expenditure 13,960 16,757 20.0% 27,257 31,607 16.0%
Operating profit (EBDITA) 14,694 18,834 28.2% 28,874 33,826 17.1%
Operating profit margin (%) 51.3% 52.9%   51.4% 51.7%  
Other income 5,213 2,669 -48.8% 11,007 8,868 -19.4%
Interest (net) 58 80 38.0% 132 147 11.3%
Depreciation 1,746 1,865 6.8% 3,480 3,708 6.6%
Profit before tax 18,104 19,558 8.0% 36,270 38,838 7.1%
Exceptional Item - 612   - 617  
Tax 2,706 2,544 -6.0% 5,059 5,215 3.1%
Profit after tax/(loss) 15,398 16,403 6.5% 31,211 33,007 5.8%
Net profit margin (%) 53.7% 46.1%   55.6% 50.4%  
No. of shares (m)         4225  
Diluted earnings per share (Rs)         16.5  
P/E ratio (x)*         8.2  
* On a trailing 12 months basis
What has driven performance in 2QFY14?
  • Net sales of Hindustan Zinc (HZL) increased by 24.2% YoY mainly due to increased sales volumes of zinc and silver. Refined zinc production (integrated) volumes increased 28.0% YoY to 195 kt due to higher production from Rampura Agucha and commencement of Zawar mines; refined silver production (integrated) volumes also grew 14.0% YoY to 83 kt.

  • Sindesar Khurd (SK) mine reached ore production run rate of 1.8 miilion tonne per annum (mtpa) and is expected to touch 2 mtpa in 2HFY14 (which is full capacity). Kayar mine is expected to start commercial production in 2HFY14 and produce 0.6 mt in FY15. Zawar mine has all approvals for producing 1.5 mtpa (FY13 production of 0.3 mt) and the company has applied for increasing mining to 5 mpta. In 1QFY14, Zawar mine had an exit ore production run rate of 1.1 mtpa.

    Cost break-up...
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw Materials 1,061  1,009 -4.9% 1,690 377 -77.7%
       % of sales 3.7% 2.8%   3.0% 0.6%  
    Stores and spares 2,884  3,411 18.3% 5,598  6,676 19.3%
       % of sales 10.1% 9.6%   10.0% 10.2%  
    Power & fuel 2,618  3,096 18.3% 5,333  5,745 7.7%
       % of sales 9.1% 8.7%   9.5% 8.8%  
    Mining royalty 2028 2656 30.9% 4072 5185 27.3%
       % of sales 7.1% 7.5%   7.3% 7.9%  
    Other mining & manufacturing expenses 2843 3677 29.3% 5422 5185 -4.4%
       % of sales 9.9% 10.3%   9.7% 7.9%  
    Employee cost 1547 1766 14.2% 3038 3546 16.7%
       % of sales 5.4% 5.0%   5.4% 5.4%  
    Other Expenditure 980 1143 16.6% 2104 2623 24.7%
       % of sales 3.4% 3.2%   3.7% 4.0%  

  • Despite the cost of production increasing by 8.0% YoY to Rs 50,522/tonne the company's EBITDA increased by 28.2% YoY to Rs 18.83 bn. This was mainly due to increase in top-line, lower staff costs as a percentage of sales (5.0% compared to 5.5% in 2QFY13) and lower other expenses as a percentage of sales (3.2% compared to 3.8% in 2QFY13).

  • Net profits increased by 6.5% YoY. The other income declined by 48.7% YoY to Rs 2.67 bn due to mark to market losses booked by the company during the quarter while depreciation expenses also increased by 6.8% YoY to Rs 1.86 bn. The tax rate was at 13.4% in 2QFY14 (14.9% in 2QFY13). There was an exceptional item of VRS of Rs 612 m.

  • HZL witnessed increasing metal premium for zinc and lead during the quarter which came at US $266/t and US $416/t respectively. The company expects higher premium to sustain in coming quarters. During the quarter, sulphuric acid realizations were down to Rs1,20/t (down Rs 2,000/t QoQ) on lower demand from fertilizer sector, however the same have increased to Rs1,900/t in recent times.

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. We remain positive on HZL's operating performance over FY14-16 as we forecast its refined zinc sales volume to improve over this period, Though the company has lowered its FY14 mined metal output guidance to 950,000 tonnes (from 1m tonnes), we remain optimistic of a strong zinc sales volume. Rupee depreciation and strong LME prices should support its earnings in 2HFY14.

The government's planned sale of its stake in HZL remains an additional potential share-price catalyst. Also, we would watch in the coming quarters for any announcement by HZL regarding the expansion of its refined zinc capacity. The key risk to our estimates remains a lower-than expected LME zinc price

At the current prices of Rs 135 the stock is trading at 8.2 times its trailing twelve month earnings. 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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