Hindustan Zinc Ltd (Q3 FY14)

India Infoline News Service | Mumbai |

HZL’s bottomline was higher than our estimate as the impact of marginally weaker operational numbers was offset by a strong other income.

CMP Rs129, Target Rs148, Upside 14.9%

  • HZL’s bottomline was higher than our estimate as the impact of marginally weaker operational numbers was offset by a strong other income. The company reported lower than expected topline due to a decrease in custom lead smelting volumes. The company has lowered the volumes of custom smelting over the last one year. Topline of Rs34.5bn was 8.6% higher on a yoy basis, boosted by strong product premiums. Mined metal production of 220,000 tons was marginally lower on a qoq basis. The growth in mined metal output has been impacted by slower rampup at its underground mines. The company has reduced the FY14 mined metal output to 0.9mn tons from 0.95mn tons guided in Q2 FY14. The guidance has also been lowered due to a change in mining sequence wherein preference has been given to primary mine development during the quarter.

  • Zinc refined metal production was flat on a qoq basis at 196,000 tons. The company has reduced custom smelting for zinc to nil as mined metal output has increased during the year. Custom smelting for lead too declined sharply during the quarter. Production of integrated lead metal decreased from 29,000 tons in Q2 FY14 to 25,000 tons. Production of silver continued to disappoint for the 3rd consecutive quarter. Silver production stood at 73 tons, down from 108 tons in Q3 FY13 and 81 tons in Q2 FY14. Product premiums decreased marginally on a qoq basis for zinc, whereas increased for lead on a qoq basis.

  • Operational performance was marginally lower than our estimate due to an increase in costs. The increase in costs was offset by higher product premiums for zinc metal sales. Operating profit of Rs18.3bn was 22.1% higher on a yoy basis due to rupee depreciation, higher product premiums and increased mined metal output. Cost of production increased by 3% qoq against our expectation of a marginal decline. We believe that the increase in costs has been due to higher mining costs and higher coal prices. Other overheads per ton of metal increased sharply on a qoq basis. We remained concerned over the sharp increase in costs on a yoy basis, as CoP is higher by 16% yoy.

  • The impact of marginally lower operational profit was more than offset by a strong qoq growth in other income. HZL reported a 58.9% qoq growth in other income to Rs4.2bn, higher than our estimate of Rs2.8bn. Effective tax rate increased from 11.2% in Q3 FY13 and 13% in Q2 FY14 to 15.1%, reducing the impact of higher other income on bottomline. PAT for the quarter stood at Rs17.2bn, higher than our estimate of Rs16.4bn.


  • HZL’s earnings growth has been subdued over the last two years on account of lower mined metal output and subdued metal prices. The company has managed to recover volumes over the last one year. 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. Depreciation of the Rupee would further lead to some upgrade in earnings for FY14 and FY15. At the CMP, the stock is trading at 2.6x EV/EBIDTA on FY15E, which is lower than the range its international peers. We recommend a BUY on the stock with a price target of Rs148. Sale of Government stake in HZL to Sesa Sterlite would lead to a rally in the stock, as it would increase the chances of buy back by the parent company.

Result table
(Rs mn)
Q3 FY14
Q3 FY13
% yoy
Q2 FY14
% qoq
Net sales
34,501
31,780
8.6
35,591
(3.1)
Mining & manufacturing
(13,304)
(14,113)
(5.7)
(13,849)
(3.9)
Personnel costs
(1,591)
(1,692)
(6.0)
(1,766)
(9.9)
Other overheads
(1,368)
(1,035)
32.2
(1,143)
19.7
Operating profit
18,238
14,940
22.1
18,834
(3.2)
OPM (%)
52.9
47.0
585 bps
52.9
(6) bps
Depreciation
(2,097)
(1,772)
18.3
(1,865)
12.4
Interest
(100)
(75)
33.7
(80)
24.5
Other income
4,240
5,063
(16.3)
2,669
58.9
PBT
20,280
18,156
11.7
19,558
3.7
Tax
(3,053)
(2,031)
50.4
(2,544)
20.0
Effective tax rate (%)
15.1
11.2

13.0

Adjusted PAT
17,227
16,125
6.8
17,014
1.3
Adj. PAT margin (%)
49.9
50.7
(81) bps
47.8
213 bps
Extra ordinary items
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BSE 290.00 [0.65] ([0.22]%)
NSE 288.80 [1.60] ([0.55]%)

***Note: This is a NSE Chart

 

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