Hindustan Zinc charts path as metal production falls in lockdown impact

With volume growth expected to be soft in FY21, higher base metal prices are crucial for upgrades

Hindustan Zinc's June quarter performance, as anticipated, was impacted by lockdown. Led by lower production days in April and reduced workforce availability due to restrictions, the company's mined metal production fell 5 per cent year-on-year and 19 per cent sequentially to 202,000 tonne.

Softening base metal prices further pulled down the performance. Per tonne zinc prices on the London Metal Exchange (LME) averaged at $1,961 in the quarter, down 29 per cent year-on-year and 8 per cent sequentially. Likewise, lead prices at $1,673 were down 11 per cent year-on-year and 9 per cent sequentially. Though the 8 per cent rupee depreciation over the year-ago quarter provided some support and helped as the company ramped up exports to compensate for weak domestic demand, the higher competitive intensity in export markets impacted metal premiums (price over benchmark).

In this backdrop, revenue from sale of zinc (about two-third to topline) declined 27 per cent y-o-y, while lead's (15 per cent of topline) was lower by 12 per cent year-on-year. Silver was the only bright spot. Revenue from sale of the white metal grew by 12 per cent year-on-year led by firm silver prices ($16.38 an ounce; up 10 per cent y-o-y).

Overall, revenue at Rs 3,989 crore was down 20 per cent, and operating profit at Rs 1,599 crore declined 36 per cent, on a yoy basis. Pre-tax profit declined 39 per cent yoy, but at Rs 1,644 crore beat consensus estimate of Rs 1,441 crore. The beat, however, was led by higher other income, which jumped by 58 per cent yoy to Rs 684 crore from Rs 255 crore last year.

Going ahead, though LME zinc prices have seen some recovery and are up from $1,843 at the start of April to $2,171 now helped by rising China consumption, demand in other global markets remains soft. Thus, not much upside is seen for zinc prices in the near term.

The company, however, is seeing some benefits from lower fuel prices (coal) as well as cost controls. The per tonne cost of production (COP) for zinc, adjusted for one-offs, was $954 and the company expects it to remain under $1,000 levels moving forward too.

In terms of metal production, it has guided for 925,000 - 950,000 tonnes during FY21, slightly higher than 916,000 tonnes in FY20. 

Analysts were building in much higher volumes. Motilal Oswal Financial Services (MOSL), for example, had estimated FY21 volumes at 1.024 million tonnes. Hence, while volumes estimates will get tweaked, higher other income expectations mean that earnings may not see major cuts. 

But, if zinc prices improve further, then the stock may see an upgrade in ratings as well. Prior to results, most analysts including those at PhillipCapital, Emkay and MOSL had neutral rating, which are likely to be maintained.

The stock, which had rebound from March lows of Rs 122 to nearly Rs 200 in early July, has since then slipped to Rs 183; post results on Tuesday, it was down 2.6 per cent.