Hindustan Zinc Ltd (Q2 FY14)

India Infoline News Service | Mumbai |

HZL’s topline of Rs25.6bn was 24.2% higher on a yoy basis led by an increase in its metal production.

CMP Rs134, Target Rs143, Upside 6.7%
  • HZL’s topline of Rs25.6bn was 24.2% higher on a yoy basis led by an increase in its metal production. Topline was also boosted by strong product premiums and some inventory liquidation of lead metal and silver. Mined metal output for the quarter stood at 221,646 tons, 16.7% higher on a yoy basis, but was lower than our estimate. Mined metal production has increased due to higher production from the Rampura Agucha mines and restarting of Zawar mines. Zinc metal production growth was strong at 20.2% yoy at 196,000 tons led by increased mined metal output. Integrated metal production too remained strong at 28% yoy during the quarter.


  • The growth in lead metal output to was strong at 17% yoy to 30,000 tons. Production of integrated lead metal too remained high on higher availability of captive concentrate. Silver production remained constrained for the second consecutive quarter. Silver production for the quarter was lower than our estimate. However, the disappointment in production was offset by some inventory liquidation, leading to a 7.7% yoy increase in sales volume. Product premiums remained strong for the second consecutive quarter against our expectation of lower product premiums qoq. Product premium over LME prices for zinc increased from US$200/ton in Q1 FY14 to US$255/ton in Q2 FY14 and that of lead increased marginally from US$247/ton in Q1 FY14 to US$254/ton.


  • Operating profit of Rs18.8bn was in line with our estimate as the impact of higher costs was offset by an increase in product premiums. Cost of production increased 8% qoq to Rs50.522/ton on account of higher coal costs, increase in diesel prices and lower by-product realizations. By-product realizations declined sharply during the quarter leading to a sharp increase in cost of production. The depreciation in the rupee led to an increase in imported coal prices. We are quite surprised by the sudden increase in CoP. The management indicated that sulphuric acid prices which had declined sharply in Q2 FY14 have improved over the last one month. The decline in other overheads aided the company in reducing the increase in CoP.


  • Other income during the quarter declined by 57% qoq to Rs2.7bn due to MTM loss on its debt investments. The hardening of long term interest rates led to a MTM loss of Rs3bn during the quarter. Effective tax rate remained low at 13% during the quarter, lower than the management guidance of 15-18%. PAT increased 6.5% yoy to Rs16.4bn, marginally lower than our estimate. The underperformance was due to a one-off impact of Rs612mn on the VRS taken by the Vizag plant employees. The company has announced an interim dividend of Rs1.6.share, maintaining its strong dividend payout ratio.


  • HZL’s has managed to recover volumes over the last three quarters led by its mined metal output. We believe the recovery would continue in FY14 wherein the company expects mined metal output to increase 15% yoy. We believe over the next two years earnings growth for the company would be led by higher volumes from the new lead smelter and mined metal output. We expect metals prices to remain subdued in FY14 as excess capacity and high inventory would cap the upside. However, the stock has run up sharply over the last one month on the back of expectations of a buyback. We change our recommendation from BUY to Market Performer on the stock with a 9-month price target of Rs143.

Result table
(Rs mn)
Q2 FY14
Q2 FY13
% yoy
Q1 FY14
% qoq
Net sales
35,591
28,655
24.2
29,842
19.3
Mining & manufacturing
(13,849)
(11,602)
19.4
(11,513)
20.3
Personnel costs
(1,766)
(1,547)
14.2
(1,781)
(0.8)
Other overheads
(1,143)
(1,075)
6.3
(1,518)
(24.7)
Operating profit
18,834
14,431
30.5
15,031
25.3
OPM (%)
52.9
50.4
256 bps
50.4
255 bps
Depreciation
(1,865)
(1,746)
6.8
(1,843)
1.2
Interest
(80)
21
-
(109)
(26.6)
Other income
2,669
5,398
(50.6)
6,203
(57.0)
PBT
19,558
18,104
8.0
19,281
1.4
Tax
(2,544)
(2,706)
(6.0)
(2,671)
(4.8)
Effective tax rate (%)
13.0
14.9

13.9

Adjusted PAT
17,014
15,398
10.5
16,610
2.4
Adj. PAT margin (%)
47.8
53.7
(593) bps
55.7
(786) bps
Extra ordinary items
(6
BSE 293.50 3.65 (1.26%)
NSE 292.55 1.85 (0.64%)

***Note: This is a NSE Chart

 

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