Metals might prove the mettle for Hindustan Zinc; stock falls over 6%

Shares of Hindustan Zinc, which have outperformed the S&P BSE Sensex in the last three months, fell over six per cent in the last three days, following subdued results for the quarter ended March 2018, correction in the broader markets and recent weakness in global zinc and silver prices.

With the company moving from open-cast to underground mining, mined metal production declined 18.3 per cent year-on-year during the January-March quarter. Nonetheless, even at 255,000 tonnes, mined metal production rose six per cent in the fourth quarter, compared to the previous quarter, and ahead of estimates.

According to analysts at Kotak Institutional Equities, the earnings were led by higher metal volumes against the estimated 240,000 tonnes, which resulted in higher zinc, lead and silver output, up 3 per cent, 11 per cent and 29 per cent, respectively, on a sequential basis. Revenues at Rs 62.77 billion came ahead of the consensus estimates of Rs 61.61 billion.

Moreover, the cost of production before royalty for zinc (a key revenue contributor) at Rs 59,569 per million tonne (mt) in the fourth quarter, was also down 10 per cent sequentially, which helped offset part of the increase in coal and diesel prices. Lower costs came despite the sequential increase in mined metal production. Operating profit (Ebitda) therefore rose 12 per cent to Rs 36.60 billion sequentially, down 3 per cent year on year, and better than Bloomberg estimate of Rs 34.64 billion. Reported net profit of Rs 25.05 billion included a one-time exceptional loss of Rs 510 million related to gratuity provision for earlier years. After adjusting for the same, the profit figure was ahead of analyst estimates of Rs 25.3 billion.

While the company’s fourth-quarter may be a blip, the road ahead looks good given the announcement of its next phase of expansion, which suggests that volumes will continue to grow and drive its prospects further.

The company, which achieved mined metal production of 947,000 tonnes (up 4 per cent) in 2017-18, is on course to achieve its targeted 1.2 million tonnes per annum (mtpa) of annual production by 2019-20. In the next phase, the company plans to increase its mined metal capacity to 1.5 mtpa. For now, there are enough capacities on hand to drive up volumes in the current year.

The company’s board has approved the first phase expansion of its brownfield units, which will increase capacity to 1.35 mtpa at an estimated cost of Rs 45 billion. This will enable the company to enhance its global market share, while maintaining cost leadership, said analysts at Edelweiss. They expect the company to benefit from tight supplies in the zinc market since new capacities are still lower than incremental demand and global inventories remain at historically low levels of six days of consumption.

Hindustan Zinc has long benefitted from tight global zinc supplies lifting its realisations, and ongoing expansions driving its volumes. Barring some lumpiness in volumes due to change in mining activities, as seen in the March 2018 quarter, the trend is likely to continue.

Given the outlook on realisations and volumes, Hindustan Zinc’s earnings should grow well in the coming years. Analysts’ target prices ranging Rs 327- 395 indicate a 7-29 per cent potential upside from current levels of Rs 304.50.