• Mined metal output declined 23.1% yoy due to slower rampup of underground mining 

• Integrated mined metal production too was lower due to lower mined metal

• Operation profit was lower than estimate due to a sharp jump in Costs

• Cost of Production (CoP) increased by 23.5% yoy and 6.6% qoq due to higher mining and coal costs, which was a negative surprise for us

• PAT of Rs18.8bn was inline with estimate as higher other income offset the impact of lower operating profit

• Volume estimates lowered due to slower rampup of mined metal output from underground mine

• HZL remains one of our preferred picks in metal sector due to inexpensive valuations and firm zinc prices

HZL's Q4 FY14 revenue of Rs36.4bn was inline with our estimate as the impact of lower mined metal output was offset by higher custom smelting and an increase in product premiums. Mined metal output during the quarter declined 23.1% yoy due to slower rampup of underground mining at Rampura Agucha and changes in mining sequence. Though zinc metal production was flat on a yoy basis, integrated metal production declined by 1.2% yoy. The decline in integrated metal production was higher in lead at 10% yoy. Silver production too remained impacted due to lower grade in SK mine ore. Integrated silver production stood at 68,000 tons from 91,000 tons in Q3 FY14. This impact was negated by an increase in product premiums. Product premiums continued to move northwards during the quarter due to the supply tightness in the region.

High costs lead to lower than expected operational profit

Operational performance was lower than our estimate due to an increase in costs. The increase in costs was offset by higher product premiums for metal sales. Operating profit of Rs17.5bn was 27% lower on a yoy basis due to lower mined metal output, jump in power costs and an increase in diesel costs. Cost of production increased by 6.6% qoq against our expectation of a marginal increase. We believe that the increase in costs has been due to higher mining costs and higher coal prices. Mining costs were also higher due to some mine development costs. Byproduct credits continued to remain low, resulting into an increase in CoP. Cost of production for the quarter stood at Rs55,467/ton against Rs44,900/ton in Q4 FY13 and Rs52,104/ton in Q3 FY14.  We remained concerned over the sharp increase in costs on a yoy basis, as CoP is higher by 23.5% yoy. For the full year FY14, CoP increased by 14% yoy to Rs51,054/ton. The management expects costs in FY15 to remain around FY14 levels. 

Impact of lower operating profit was offset by a jump in other income

The impact of lower operational profit was more than offset by a strong qoq growth in other income. HZL reported a 38.9% qoq growth in other income to Rs5.9bn, higher than our estimate of Rs3.5bn. Effective tax rate for the quarter decreased from 15.1% in Q3 FY14 to 11.2%. PAT for the quarter stood at Rs18.8bn, inline with our estimate. The company had cash and cash equivalents of Rs255.4bn, out of which Rs205bn was invested in debt mutual funds, Rs19.8bn in bonds and Rs30.2bn in fixed deposits. HZL has announced a final dividend of Rs2/share, taking the total dividend for FY14 to Rs3.5/share.

Reserves and resources increase by 16.8mn tons

In FY14, the company managed to add 26.1mn tons of reserves and resources, prior to a depletion of 9.3mn tons during the year. Total reserves and resources on March '14 stood at 365.1mn tons, containing 35.2mn tons of zinc-lead metal and 28,804 tons of silver. Overall mine life continues to be +25 years.

Valuation inexpensive; Maintain BUY

We believe that the tight market condition in zinc global market would continue in 2014 as we estimate demand from the developed nations of US, Europe and Japan would be higher due to the on-going monetary easing in the regions. We have lowered our mined metal estimates for FY15 and FY16 inline with management guidance. We believe going ahead earnings for the company would receive a boost from the increase in mined metal output, firm zinc & lead prices and higher operational efficiencies. We expect HZL to witness earnings CAGR of 3% over the period FY14-16 even on our assumption of a stronger rupee in FY16. At the CMP, the stock is trading at 7.6x P/E and 3.4x EV/EBIDTA on FY15E, which is lower than the range of its international peers. Current cash and cash equivalents of Rs256bn (46% of current mcap) is expected to rise to Rs360bn (65% of mcap). We rollover our target price on FY16 estimates and maintain our BUY recommendation with a revised price target of Rs148.