Hindustan Zinc share price falls 1.14% as Q2 operationally disappointing

Lower zinc prices and volumes, and rising cost of production affected performance

The impact of volatile base metal prices and rising input costs was clearly visible on Hindustan Zinc's performance for the September quarter (Q2). The lower-than-expected zinc production was another damper, though it was partly mitigated by rising output of lead and silver. Given the weak operating numbers and near-term concerns, it is not surprising that Hindustan Zinc's share price fell 1.14 per cent to close at Rs 282.60 on Monday.

The volatility in base metal prices is primarily because of concerns over global trade wars. Zinc prices on the London Metal Exchange (LME) averaged at $2,537 a tonne, down 14 per cent year-on-year (yoy), and 18 per cent sequentially. Prices of by-products, lead and silver, too, fell 10-11 per cent over last year (9 -12 per cent sequentially). 

The loss on the pricing front was partly compensated by total mined metal production, rising 6 per cent yoy. Though integrated zinc production fell 16 per cent yoy to 162,000 tonnes because of temporary mismatch in mined metal availability, lead production surged 30 per cent yoy at 49,000 tonnes. Output at 172 tonnes was up 23 per cent yoy. Yet, lower prices meant that revenues were at Rs 47.77 billion, lower by 10 per cent y-o-y, and came below Bloomberg consensus estimate of Rs 50.39 billion. 

The steep increase in input prices such as those of coal, diesel, etc, pushed up zinc production costs by 5 per cent yoy to $1,034 (Rs 72,449); the rupee cost was up 14 per cent. Thus, operating profit at Rs 23.15 billion declined 24 per cent yoy and missed analysts' estimates of Rs 25.74 billion. The lower tax rate allowed net profit to come at Rs 18.15 billion, a shade lower than estimates of Rs 18.30 billion.

Positively, Hindustan Zinc expects to reach 1.2 million tonne per annum (mtpa) of mined metal capacity in 2019-20 (FY20), and thereafter plans to ramp it up further to 1.35 mtpa. Also, coal costs seem to have peaked out - the company expects some coal linkages, while ramp-up at Rampur Agucha mines will reduce costs. The production ramp-up is crucial as analysts are expecting global zinc supplies to increase, leading to a surplus situation in FY20. Kamal Kant Sahoo at Emkay Global, who had a buy rating, however, said he would be watchful on improvement in the December quarter performance.