Incorporated in the mid-sixties, Hindustan Zinc (HZL) was a wholly-owned company of the government of India till May 1992 when its shares were disinvested. Sterlite group acquired 46 per cent stake in the company at Rs 40.5 per share and took over the management control. The group's current holding in HZL stands at 65 per cent.
The company is engaged in mining and refining ore, and mainly produces zinc and lead which are supplied to engineering and automobile industries.
It posted a net profit of Rs 138.40 crore for the quarter ended December 31, 2003, compared with Rs 37.40 crore for the quarter ended December 31, 2002, an increase of 270.05 per cent.
Total income increased to Rs 515.50 crore from Rs 325.30 crore, a rise of 58.47 per cent. The HZL scrip currently trades at Rs 101 levels at a P/E of 11x. Kuldip Kaura, managing director, spoke to The Smart Investor about the company's turnaround and future plans.
Excerpts:
What has caused the turnaround in the financial performance of Hindustan Zinc?
When we (Sterlite) came to Hindustan Zinc, it produced 175,000 tonnes of zinc. We focused on operational excellence besides trying to address issues like throughput and efficiencies of plants and recoveries.
Our earlier experience of dealing with PSU companies also helped us change things fast at HZL. We produced 207,000 tonnes of zinc by end of the first year, which was 20 per cent higher compared to the previous year.
Was it because of better capacity utilisation?
Yes, it was. It was also because of plant availability and better recoveries. Besides, there has been a substantial improvement in our throughput.
All these factors led to debottlenecking. We brought down power costs by reducing consumption by 10 per cent. Earlier, the company used to buy all its power from the state grid. We generated our own power, which resulted in a saving of about 40 per cent.
We also set up a 30 mega watt captive power plant (CPP). Some of the savings you see this year are because of the CPP commissioning. We also reduced our power consumption by 10 per cent. Besides, we reduced man power to 6,060 from 8,100. The outgo on VRS was close to Rs 180 crore.
Tell us about your capex plans for this year?
We want to expand because the demand supply gap is expected to increase.
We decided to expand our capacity by putting a brownfield smelter for 170,000 tonnes of zinc at the Chanderia site. The expansion plan has two other components - a coal-based CPP of 154 mega watts and the expansion of our mine at Rampura Agucha.
We are expanding our mines from our current capacities as we need more concentrates. When we came in the mine was designed at 1.4 MTPA (million tonnes per annum). We hope to increase the mine's production by 30 per cent through debottlenecking. The expansions are expected to cost around Rs 1,550 crore.
How are you going to fund the project?
The original plan for funding was 50 per cent from internal accruals and 50 per cent from borrowings, for which we have done external commercial borrowings (ECBs) of $125 million.
Due to the strong cash flow in HZL, more of internal accruals will now be used to fund the project .
What is HZL's debt-equity ratio?
We are a zero-debt company. The $125 million we raised to fund the expansion are our only debt.
What kind of cost savings have you managed?
When we came in the cost of production was around $870 per tonne. Today, it is $570 per tonne. We are targeting a cost level of around $500 per tonne. At that level, we will be the lowest cost producer of zinc in the world.
Is betterment in efficiencies the main reason for the improvement in financial numbers? Is it because of sales volumes, too?
Both. We took excess concentrates to other smelters in Korea and China and got refined zinc back after paying treatment and refining charges.
This gives us two advantages: We are able to bridge the local demand supply gap besides preparing ourselves to cover the market when our own smelters come into production. It also added to our bottomline.
What are your competitive advantages?
HZL has world class zinc reserves and is already one of the lowest cost producers of zinc. Low operating cost, logistics advantage and rich mineral reserves make India a natural choice for metal and mining business.
Even logistics-wise we have an advantage. Our strategy is to achieve cost leadership. If we produce zinc at $500 per tonne, that will insulate us from any sudden financial crunch due to depressed prices.
What is your outlook on prices?
The zinc world market is about 9 million tonnes. The market is estimated to post 4 per cent growth. But the production capacity has not been increasing much in the recent past.
In fact, some of the smelters in the West are closing. It means the demand-supply situation is tight. This is resulting in continuous draw down in warehouse inventories. So prices are likely to remain firm in the medium term.
What will drive world demand?
About 50 per cent of the zinc is used in steel galvanising globally. It is 75 per cent in India. Steel industry is witnessing strong growth, led by automobiles and infrastructure sectors. The demand on the Chinese side is also quite strong.
What is your outlook for FY05?
The zinc market is growing. Within one year we will have a production and sales number of 400,00 tonnes. Within three years the company will grow to 400, 000 tonnes. This will put us at fourth among zinc producers in the world.
Apart from zinc, lead is also a part of our product portfolio. Indian demand for lead is about 130,000 tonnes while the current production is about 40,000 tonnes in the primary lead sector. So there is a gap there. We have decided to expand our lead capacity by 50,000 tonnes. These expansions will improve profitability.
What is your view on the company's current valuations?
Looking at the positives that we enjoy, our valuations should be better than what it is now. And if you look at international P/Es also, there is scope for improvement in valuations.
