Hindustan Zinc stock turns attractive after the recent correction

Rising volumes and stable costs should support earnings despite volatile base metal prices

After falling to its 52-week low last week, the stock of Hindustan Zinc has rebounded a bit, gaining 8.4 per cent. The pressure on the stock was due to the weak demand and volatility in base metal prices. 

Zinc prices on the London Metal Exchange, after regaining the $3,000 a tonne levels at the start of April, have slid to $2,500 a tonne couple of weeks ago. The 10 per cent decline in the metal, which is largely used in alloys, saw the correction due to concerns of a full-blown tariff war between the US and China. 

This would have led to a global slowdown and low demand for base metals. Analysts are hopeful there will be some respite. This comes on the back of conciliatory tones from both the US and China at the G20 summit. Zinc prices are now rebounding and have been trading at around the $2,600-a tonne level. A positive outcome on the trade talks, however, will be crucial. 

Analysts say the global refined zinc market is expected to remain in deficit for a fourth consecutive year in CY19, with inventory at record low levels. This should provide support to zinc prices at these levels and, in turn, act as a base for the Hindustan Zinc stock. 

The company, however, remains well placed to continue benefitting on the volume growth front. After closing FY19 at a run rate of 1.0 million tonne per annum (mtpa), it is on course and plans to achieve an exit rate of 1.2 mtpa by the end of FY20, with plans to further expand capacity to 1.35 mtpa underway thereafter.  The company has been changing its mining methodology to underground mining from open cast mining. 

The firm’s cost of production (COP) is likely to remain stable, which should support profitability. Analysts say zinc per tonne COP in FY20 is expected to be $1,000, as against an average of $1,014 tonne in FY19. The lower energy costs (higher proportion of linkage coal and lower thermal coal prices) and start of shafts bringing operational efficiencies are to offset higher mining development expenses. The company commissioned shafts at the Rampura Agucha and Sindesar Khurd mines. Thus, volume growth and stable costs should support earnings even as base metal prices remain volatile. 

The company, which had cash and cash equivalents to the tune of Rs 17,000 crore, had declared a special dividend of Rs 20 per share. A dividend yield of 3-5 per cent and expectations of good yields in the future is what is keeping analysts positive on the stock. Most brokerages have a favourable view on the stock after the recent correction. Analysts at Antique Stock Broking have upgraded the stock to a buy after the recent correction on low global inventory levels and lower supply of refined zinc in the current calendar year. The stock is trading at a reasonable five times its FY20 enterprise value to operating profit.