Improving outlook can bring back shine in Hindustan Zinc

Rebounding zinc and firm silver prices will add to gains from rising production

Hindustan Zinc’s (HZL’s) July-September quarter (second quarter, or Q2) performance was better than the first quarter (Q1). It was driven by a rebound in base metal prices. While zinc and lead prices on the London Metal Exchange (LME) nosedived in the April-June quarter (Q1), the sharp recovery thereafter has improved the company’s outlook.

An improving outlook and increased dividends can further lift sentiment towards HZL, which, after a strong rebound between March-lows and mid-August, had been range-bound. On Wednesday, it surged 4.5 per cent.

LME zinc prices per tonne averaged $2,335 in Q2, higher than $1,961 in Q1 and 1 per cent lower year-on-year (YoY). Lead, too, recovered 12 per cent sequentially, averaging $1,873 in Q2. Even though lead averaged 8 per cent lower YoY, the other byproduct, silver, saw sharp rally — up 48 per cent sequentially and 43 per cent YoY at $24.26 an ounce.

HZL also did well on the production front, with mined metal output rising 9 per cent YoY to 238,000 tonnes. Refined zinc and lead metal production jumped 9 and 29 per cent YoY and 15 and 28 per cent sequentially, respectively. Silver volumes also surged, rising 51 per cent YoY and 73 per cent sequentially.

The total revenue at Rs 5,660 crore grew a strong 25 per cent YoY and 42 per cent sequentially in Q2.

Operationally, lower coal, metallurgical coke, and cement prices meant that the cost of production before royalty also improved. At $919 per tonne, it was down 12 per cent YoY and 10 per cent sequentially.

All this pushed up operating profit by 39 per cent YoY and 85 per cent sequentially, while pre-tax profit at Rs 2,622 crore improved 25.6 per cent YoY and 57.5 per cent sequentially.

Lead and zinc (now $2,472) prices are expected to improve further, while silver remains firm. The company is expected to achieve its production guidance of 900-950 million tonnes (mt). Production cost is expected to remain below $1,000 per tonne.

Credit Suisse had recently raised its target price to Rs 250, as it upgraded volumes for FY21 (2020-21)-FY22, expecting 1.1 mt of mined metal production and 800 tonnes of silver in FY22.