There's still zing in Hindustan Zinc

Increasing output and firm zinc price bode well for earnings growth

As Street expectations on Hindustan Zinc remained high after good production numbers and rising zinc prices, some disappointment from the December quarter profitability isn't a surprise or worrisome, as the company’s prospects remain healthy.

The company’s earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 2,757 crore was up 22 per cent sequentially and 26 per cent year-on-year (y-o-y), but came lower than the Bloomberg consensus estimate of Rs 2,821 crore, primarily due to rising costs coming ahead of expectations. The increase in cost of production was largely on account of a one-time change in the ore to waste ratio norm over the life of the mine and additional excavation in Rampura Agucha open-cast mine. This was further accentuated by significantly higher mine development in underground mines (since underground mining is more expensive than open-cast mining), increase in coal prices and lower acid realisation, some of which was partly offset by higher volume and better overall grade of output.

Consequently, power and fuel costs surged by 12 per cent y-o-y, mining royalty almost doubled from Rs 363 crore in the year-ago quarter to Rs 717 crore in the December quarter. The depreciation costs also surged significantly, owing to a change in depreciation methodology (from straight line to written-down value method). Thus, net profit at Rs 2,320 crore, even as it was up 22 per cent sequentially and 26 per cent y-o-y, was lower than the consensus estimate of Rs 2,424 crore. The stock, thus, closed 2.75 per cent down at Rs 315.25 on Friday, and was flat in Monday’s trade.

Though costs are expected to remain elevated moving forward too, on the volumes front, the company achieved highest-ever mined metal production during the December quarter, up 44 per cent sequentially and 21 per cent y-o-y. The sequential increase was on account of higher volumes from Rampura Agucha open-cast mine in accordance with its mine plan and the y-o-y increase was driven by higher volumes from Rampura Agucha underground as well as open-cast mines. The company, which is changing its mining methodology to underground, in the financial year-till-date has seen underground mines ramped up significantly to achieve a substantial 60 per cent y-o-y increase in ore production and 53 per cent y-o-y increase in mined metal production, said the company. Hence, output will continue rising helping the company achieve its targets of 1.2 million tonne per annum (MTPA) mined metal production in a few years. The quarter saw 2,05,000 tonnes of mined metal production.  

The run-up in base metal prices has accrued benefits too. Zinc remains the best performing base metal in past one year. During the quarter, zinc prices averaging at $2,518 a tonne were 56 per cent higher year-on-year and 12 per cent sequentially. Lead and silver prices at $2,518 a tonne and $17.2 an ounce were also up 28 per cent and 16 per cent y-o-y, respectively. Moving forward, too, zinc prices are likely to remain firm on supply concerns. Higher output and firm prices should help the company clock good growth in earnings.

The stock price of Hindustan Zinc, too, has rallied substantially, doubling from lows of Rs 155 on February 12, 2016, to Rs 315.25-levels now. Hence, even as prospects look good, investors can consider the stock on dips.