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Hindustan Zinc: Volumes take a beating
Nov 6, 2014

Hindustan Zinc has announced its September quarter results. The company has reported 6.8% YoY increase in net sales while profits have grown by 33.1% YoY for the quarter ended September 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 6.8% YoY during the quarter, driven by higher zinc LME price partly offset by lower volumes; fall in silver prices and rupee appreciation. A 19% YoY decline in silver revenues dragged sales growth. Lead revenues also declined 2% YoY.
  • Operating profits increased 6.2% YoY despite lower volumes due to higher LME prices. The zinc LME prices increased 24% YoY to US$ 2,311 per MT while the lead LME prices increased 4% YoY to US$ 2,181 per MT. The cost of production for zinc (without royalty) was up 9% YoY and 12% YoY in Rupee and Dollar terms respectively.
  • Bottomline increases by 33.1% YoY accentuated by strong treasury income.
  • The board of directors declared an interim dividend of Rs 1.9 per share during the quarter. Cash balance & liquid investments stood at Rs 275 bn at the end of the quarter.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 35,591 38,024 6.8% 65,433 68,096 4.1%
Expenditure 16,757 18,028 7.6% 31,607 34,576 9.4%
Operating profit (EBDITA) 18,834 19,996 6.2% 33,826 33,520 -0.9%
Operating profit margin (%) 52.9% 52.6%   51.7% 49.2%  
Other income 2,669 6,967 161.0%  8,868 14,140 59.5%
Interest (net) 80 13 -83.7% 147 89 -39.3%
Depreciation 1,865 2,061 10.5%  3,708 4,084 10.1%
Profit before tax 19,558 24,888 27.3% 38,838 43,487 12.0%
Exceptional Item 612 28 -95.4% 617 28 -95.4%
Tax 2,544 3,025 18.9%  5,215 5,447 4.5%
Profit after tax/(loss) 16,403 21,835 33.1% 33,007 38,012 15.2%
Net profit margin (%) 46.1% 57.4%   50.4% 55.8%  
No. of shares (m)         4225.1  
Diluted earnings per share (Rs)         9.0  
P/E ratio (x)*         9.6  
* On a trailing 12 months basis

What has driven performance in 2QFY15?

  • Net sales of Hindustan Zinc (HZL) increased by 6.8% YoY. Mined metal production was at 213,000 MT in 2QFY15 lower by 4% YoY (222,000 MT in 2QFY14). The decrease is predominantly because the company excavated more waste than ore in 2QFY15. Refined zinc production (integrated) volumes declined 11% YoY to 174,000 MT while refined silver production (integrated) volumes declined by 19% YoY to 67,000 MT. Despite poor performance in 1HFY15, volumes are expected to pick up in second half of the year as the proportion of waste excavation shall decline.

  • The company's cost of zinc production (before royalty) rose by 9% YoY to Rs 55,154/ton due to lower production, smelter shutdown costs and increase in employee expenses. The company has entered into a long term wage agreement with its employees which shall result in an increase of US$16 per MT in cost of production for zinc.

  • EBITDA improved by 6.2% YoY due to higher LME prices for zinc partly offset by higher cost of production.

  • Net profits increased by 33.1% YoY. The rise at the net level was cushioned by strong operating performance as well as a 161% YoY growth in other income. Growth in other income was aided by higher treasury income. This coupled with an 83.7% YoY fall in interest expenses propelled profitability growth.
What to expect?

As during the preceding quarter even in this 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 1HFY15, total mine development increased by 21%. While all expansion projects are on schedule the progress at Rampura Agucha mine was slower than expected.

At the current price of Rs 168 the stock is trading at 9.6 times its trailing twelve month earnings. With mine production expected to get a boost in second half management expects a marginal growth in FY15. Even the LME prices for zinc and lead registered improvement in 2QFY15. And may remain in the upward trajectory in the near future. However, fall in silver prices and exchange rate movement is a bit of a concern. Taking into consideration the recent developments and current valuations we maintain our HOLD view on the stock. However, 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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