Hindustan Zinc: Awaiting fresh triggers for earnings growth amid low demand

Analysts at HSBC, not expecting zinc prices to cross $2,200 in the foreseeable future, have reiterated "hold" rating given potential for volume growth and high dividend yield

Hindustan Zinc’s June quarter performance, as anticipated, was affected by the lockdown. Lower production days in April and reduced workforce availability because of restrictions saw mined metal production fall 5 per cent year-on-year (YoY) and 19 per cent sequentially to 202,000 tonne.

The per-tonne zinc price on the London Metal Exchange (LME) averaged $1,961 in Q1, down 29 per cent; the average lead price of $1,673 was 11 per cent lower YoY. The 8 per cent rupee depreciation YoY provided some respite but metal premia (over benchmark) were down.

Thus, zinc revenues (about two-thirds of top line) declined 27 per cent YoY, while lead’s (15 per cent of top line) declined 12 per cent YoY. Silver was the only bright spot, posting 12 per cent revenue growth YoY, led by firmness in the silver price (up 10 per cent YoY to $16.38 an ounce).

Overall, revenue at Rs 3,989 crore declined 20 per cent YoY; operating profit (Rs 1,599 crore) was down 36 per cent. Pre-tax profit declined 39 per cent YoY, but at Rs 1,644 crore, helped by higher other income of Rs 684 crore (up 59 per cent YoY), it beat consensus estimate of Rs 1,441 crore.
 

Though the LME zinc price has recovered 18 per cent since April to $2,171, helped by the rising China consumption, demand in other global markets remains soft and not much upside is seen in the price in the near term.

 

 

The company is benefitting from a lower fuel price (coal) and per-tonne cost of production (COP) for zinc — adjusted for one-offs — at Rs $954 is expected to remain at similar levels.

However, the guidance for metal production of 925,000 - 950,000 tonne during FY21 is slightly higher than 916,000 tonne in FY20. Analysts at Motilal Oswal Financial Services (MOSL) had estimated FY21 volumes at 1.024 million tonne. They are now tweaking estimates. Though higher, other income expectations mean earnings may not see cuts, upgrades hinge on a higher zinc price.

Analysts at HSBC, not expecting the zinc price to cross $2,200 anytime soon, have reiterated their “hold” rating, given the potential for volume growth and high dividend yield. MOSL, factoring in the zinc price of $2,125 for FY21, has also maintained the neutral rating.

The stock, after correcting 2.6 per cent on Tuesday following the subdued results, jumped over 7 per cent with a rise in precious metal prices. A higher silver price bodes well.

Nevertheless, zinc’s outlook remains crucial, and the stock, after rebounding over 60 per cent from March lows, is already factoring in an increase in the zinc price. The target prices of HSBC and MOSL, ranging Rs 200-208, indicate limited upside for the stock.