Hind Zinc: The zing is missing

The firm’s top line could slip further unless zinc prices stabilise.

In the past two months, prices of zinc have come off by about 6 per cent to $1780 per tonne, according to Bloomberg. The current levels are thus sharply lower than the peak of $4,100 per tonne reached in October, 2007. Global inventories of the metal have risen by about 4 per cent in the last two months to about 156,500 tonnes. This is possibly what has prompted some international manufacturers such as Australia’s Perilya to cut back output at its Broken Hill operations from 91,000 tonnes per annum to 55,000 tonnes per annum. Analysts believe the cut in supplies could help prevent a further slide in the prices.

At home, the Rs 7,878 crore zinc manufacturer, Hindustan Zinc (HZL), has stated in its balance sheet that the “adverse impact of lower zinc LME prices and the appreciation of the rupee have been effectively countered by increasing volumes.” However, in FY08, despite an increase in the production of saleable zinc by 22.4 per cent y-o-y, net sales declined by 8 per cent y-o-y to Rs 7,878 crore.

In the June 2008 quarter too, the company’s net sales fell 16 per cent to Rs 1,643 crore as prices of zinc dropped on LME. As a result, operating profit margins contracted by 1,340 basis points to 59.5 per cent. With demand slowing down in China – the country consumes about 30 per cent of the world’s zinc -- and markets in the US and Europe facing a downturn, the outlook for zinc is not too encouraging.

HZL is facing some temporary bottlenecks at its plant including a shortage of the intermediate product calcine and a planned shutdown of the pyro-smelter for 45 days in the second quarter ending September 2008.

That too could hurt the top line though there will be some respite on the exports front with the rupee having depreciated in the last three months. The company has increased capacity by 88,000 tonnes per annum to around 6,69,000 tonnes in April this year and plans to add capacity for another 2,10,000 tonnes per annum by 2010. That will add to the supply in the marketplace and keep prices in check.

The stock has been an underperformer since January 2008, losing nearly 46 per cent compared with a 38 per cent fall in the Sensex. Since the start of August, the stock has come off by 23 per cent while the market has fallen 14 per cent. At the current price of Rs 451, the stock trades at 5.5 times its estimated FY09 earnings.