Hindustan Zinc: No negative surprises in challenging times

Results in line with Street estimates, despite base metals prices remaining weak

With a steep fall in base metals prices, one would expect Hindustan Zinc Ltd (HZL)’s December quarter numbers to be hit. However, the Street seemed content — because despite challenges, the company’s performance was in line with estimates.

The quarter saw average per tonne LME (London Metal Exchange) zinc at $1,612, down 28 per cent year-on-year and 12.7 per cent sequentially, while lead was down 16 per cent and 1.9 per cent, respectively; silver was 4.5 per cent lower and half a per cent up, respectively. Zinc and lead production, which increased eight per cent year-on-year and 42 per cent year-on-year to 206,322 tonnes and 35,352 tonnes, respectively, on smelter efficiency and conversion of inventories, partially eased lower prices. Even silver production at 116 tonnes was up 67 per cent year-on-year, the highest ever by HZL. Thus, net sales at Rs 3,385 crore, though down 11 per cent year-on-year, were in line with Bloomberg consensus estimates of Rs 3,384 crore.  

Operationally, HZL is benefitting from lower coal and commodity costs. But, lower LME prices and the newly levied contribution to District Mineral Foundation hurt Ebitda (earnings before interest, tax, depreciation, and amortisation) which at Rs 1,474 crore fell 29 per cent year-on-year, again in line with estimates of Rs 1,471 crore. Lower taxes helped net profit at Rs 1,811.40 beat estimates of Rs 1,656 crore.

Given the absence of negative surprises even as times are challenging, the stock closed 1.7 per cent higher at Rs 141, even as the Sensex was down 0.4 per cent on Thursday. During the past few days, while the broader indices corrected sharply, HZL did not see a  similar correction; over three and six months, the stock has largely tracked the Sensex, even as its peers are down significantly.

Base metal prices are weak, but regional premiums for zinc and aluminium have been stable, which is a good sign. Also, analysts are expecting zinc fundamentals to improve after production cuts by global firm Glencore and Chinese producers. HZL is seeing changed mining strategy, from open-cast to underground mining, besides ramping up of all mines. HZL is working on lowering its cost structure. All analysts polled on Bloomberg since December 15 have buy or outperform rating on the stock.

Analysts at Reliance Securities say revenues beat estimates as regional premiums came higher. They expect higher volumes and estimate the zinc market to be in deficit over two-three years, which will sustain strong prices; this drives their positive view.