Hindustan Zinc: Volumes boost Q4 numbers

Improving prices and mined production keep analysts positive, with resource base of 365 mt

Hindustan Zinc (HZL) posted better-than-expected performance for the quarter ending March, largely driven by a surge in volumes. Mined metal production at 269,000 tonnes was better than the previous quarter’s 200,000 tonnes and the year-ago period’s 242,000 tonnes. On the other hand, average zinc prices on the London Metal Exchange at $2,087 a tonne were down seven per cent sequentially, though up three per cent year-on-year. Lead prices continued to suffer, with the average at $1,803 a tonne, down 10 per cent sequentially and 14 per cent on a year-on-year (y-o-y) basis. Although silver prices were up marginally by one per cent sequentially to Rs 37,099 a kg, it was down 17 per cent over the March 2014 quarter.

Clearly, better volumes stole the show and helped net sales grow 13.5 per cent y-o-y to Rs 4,072 crore, better than the Bloomberg consensus estimate of Rs 3,955 crore. Earnings before interest, tax, depreciation and amortisation at Rs 1,978 crore also came marginally better than the consensus estimate of Rs 1,975 crore. Higher tax expenses (up 124 per cent y-o-y at Rs 535 crore) that included deferred taxes and were net of minimum alternate tax (MAT) credit entitlements led to a tepid growth of 6.2 per cent in net profits to Rs 1,997 crore.

The higher mined metal production during the second half of the last financial year made up for lower production in the first half. Thus, FY15’s annual output came at 887,000 tonnes, slightly higher than 880,000 tonnes in FY14.

For FY15, zinc revenues at Rs 11,096 crore, growing 13 per cent y-o-y, provided the boost. Lead revenues at Rs 1,784 crore grew two per cent. Revenues from silver sales at Rs 1,187 crore, however, declined 21 per cent y-o-y due to weak prices.

Zinc prices would remain better than FY15, thanks to closure of many mines. In fact, prices have run up sharply from slightly less than $2,000 a tonne in mid-March to $2,200 a tonne. Various analysts estimate average zinc prices to be in $2,100-2,200 a tonne range, positive for HZL. The company’s mined metal production is also likely to grow, driven by other mine ramp-ups. While the Rampura Agucha mines will continue to provide the majority of mined metal in FY16, overall production from this mine will be less than in FY15. The gap will be made up primarily by higher volumes from the Sindesar Khurd mines as production from others as Rajpur Dariba and Zawar also provide for further improvement.

Overall, in five years (by 2020), HZL’s annual production of mined metal is expected to reach 1.2 million tonnes.

Looking at the positives, 15 of 18 analysts polled on Bloomberg since March have ‘buy’ and the rest ‘hold/accumulate’ ratings with consensus target price of Rs 187 (10 per cent upside) for the stock trading at Rs 170.