Increasing volumes drive Q3 for Hindustan Zinc

With earnings beating estimates and volumes growing, analysts are upgrading target prices

After gaining five per cent in three trading sessions, Hindustan Zinc Ltd (HZL) rose 0.75 per cent to Rs 161.65 on Tuesday, after its earnings for the December quarter beat estimates. Analysts say there could be more gains ahead, a contrast to the outlook for most metal stocks.

At $2,023 a tonne, lead prices in the December quarter were down seven per cent sequentially and four per cent year-on-year. Silver prices fell 15 per cent year-on-year and about 10 per cent sequentially. Zinc averaged $2,250 a tonne, down three per cent sequentially but 18.6 per cent higher year-on-year. As a result, net sales rose 11.4 per cent year-on-year to Rs 3,804 crore but missed the estimate of Rs 3,995 crore.

Rising volumes and better profitability helped HZL post a better-than-expected profit. At 242,000 tonnes, mined metal production grew 10 per cent year-on-year and 13.8 per cent sequentially, a trend likely to sustain.

Despite higher mining royalty rates, operating leverage from higher volumes and lower diesel prices aided earnings before interest tax depreciation and amortisation (Ebitda). For the quarter, Ebitda was Rs 2,089 crore (against the estimated Rs 2,059 crore), up 4.5 per cent sequentially and 14.6 per cent year-on-year. Analysts believe margins will remain healthy through the next couple of quarters.

These factors, along with near-doubling of other income, helped HZL post a net profit of Rs 2,379 crore, ahead of the Bloomberg consensus estimate of Rs 2,161 crore.

Analysts expect the ramp-up in volumes to sustain, aided by the transition from open-cast to underground mining. They believe prospects for zinc, which accounts for 75 per cent of revenue, are healthy due to global supply constraints.

Considering these  improving fundamentals and incorporating economists’ revised currency rates, analysts at Kotak Institutional Equities have increased their Ebitda estimate for HZL for FY15-17 by 8-13 per cent. The fair value estimate has been increased from Rs 190 a share to Rs 205. The analysts say the stock is trading at 3.6 times the FY16 estimated enterprise value/Ebitda.

Analysts at Motilal Oswal Securities, who estimate HZL's mine production will grow at a compounded annual rate of three per cent over FY14-17 to 952,000 tonnes, are bullish on the stock, with a target price of Rs 215. Similarly, analysts at HSBC remain overweight on HZL, with a target price of Rs 204. The Bloomberg consensus target price for the stock is Rs 193.