HZL gains from rising metal prices

Last Updated: Tue, Jul 22, 2014 02:01 hrs

Hindustan Zinc’s results for the quarter ending June were not only below the Street’s expectations but weak on the operational front. Despite improving prices for zinc and lead, the lower mined metal production and relatively elevated costs led to this performance.

Net sales at Rs 2,963 crore were less than the Bloomberg consensus expectation of Rs 3,137 crore. And, the earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 1,352 crore also came much lower than the estimate of Rs 1,529 crore.

However, a 15.7 per cent jump in other income to Rs 717 crore supported the net profit, which at Rs 1,618 crore came marginally lower than the expected Rs 1,625 crore.

In this backdrop, the stock closed almost half a per cent down on the bourses at Rs 164.20. The drop could have been more but for the fact that the market had already sensed some disappointment. Analysts at ICICI Securities in their report on July 9 had said HZL remained one of two key disappointments (in base metals) in the first quarter of FY15. They’d estimated volume to drop around 20 per cent over a year, due to the ongoing transition of mining operations to underground from open pits. They had, however, expected a higher realisation to arrest the Ebitda decline.

While the sharper than expected fall in Ebitda is a concern, improving zinc prices are a positive. Giriraj Daga at Nirmal Bang Institutional equities believes higher prices will support the stock. At the current level of Rs 164, it trades at a reasonable 10 times FY15 earnings. And, cash levels are rising, at Rs 26,272 crore at end-June, equivalent to 38 per cent (Rs 62 a share) of the company’s market cap.

Lower output
The mined metal production at 163,000 tonnes during the June quarter was 31 per cent lower than the 238,000 tonnes in the year-ago quarter; it was also lower than the 200,000 tonnes in the March quarter. This led to integrated zinc production declining 20 per cent year-on-year to 139,000 tonnes. Integrated lead and silver production volumes declined 21 per cent and 28 per cent to 22,000 tonnes and 56 tonnes, respectively.

The pain would have aggravated but for better price realisations. The per-tonne London Metal Exchange (LME) zinc price at $2,074 improved 13 per cent over a year earlier during the quarter; lead prices moved marginally higher by two per cent to $2,096. Silver prices continue to remain subdued and at $19.6 an ounce, about 15 per cent lower over a year.

Mined metal volumes are likely to remain subdued in the near term. The company’s Rampur Agucha mine in Rajasthan is making a transition from open pit to underground mining. HZL already had toned down its volume growth forecast in the past 12 months. While any positive news on the guidance is awaited, analysts feel the transition will take another year.

The company, however, sounds optimistic and says the decrease is in line with its mining plan and the second half will see higher production. Analysts feel overall production during the year might be marginally lower than the previous financial year.

The boost to prospects, however, will continue to come from rebounding zinc prices. They were $1,958 a tonne s on the LME at the start of the June quarter, reached $2,200 by the quarter’s end and have further moved up to $2,288. This has led analysts to upgrade their base metal price estimates, too. They believe this upside will provide support to the stock.

All the 14 analysts polled by Bloomberg during July remain positive on Hindustan Zinc and their consensus target price is Rs 168. Given the brighter prospects for FY16, aided by higher volumes, long-term investors could consider the stock on dips.

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