Zinc major Hindustan Zinc turned in a good set up of numbers for the December 2010 quarter on the back of volume growth and higher zinc prices. However, while the revenues were up and are expected to remain strong going ahead, cost pressures in the quarter dented profitability. Analysts believe its aggressive expansion and demand growth, reasonable valuations, huge cash and cash equivalent to the tune of Rs 13,000 crore are positives and make the scrip a good investment.
Decent growth
The company's reported numbers were ahead of Street estimates, largely led by a volume growth of 20 per cent and a marginal improvement in the LME zinc prices by about 5 per cent to $2,315 a tonne. Hindustan Zinc reported a 17.3 per cent growth in revenue during the quarter ending December 2010. The additional volumes were contributed from the recently commissioned Dariba smelter, adding 46,500 tonnes during the quarter ended December. The operating margins declined by 440 basis points to 57.9 per cent due to the cost pressure on account of the higher mining and fuel costs. This is also a reason that the operating profit grew just about 9 per cent. Nevertheless, the net profit grew a decent 12.2 per cent, partly due to higher other income.
Outlook
From the January to November 2010 period, the global zinc consumption was 11.45 million tonnes as against the production of 11.67 million tonnes. However, thanks to the growth in demand, the gap is narrowing and the level of inventories is coming down. Though zinc prices have found support, it is still early for the prices to go up, thus investors might not see substantial gains accruing on account of higher prices, feel analysts. Meanwhile, Hindustan Zinc's aggressive expansion will help the company post a decent revenue growth going ahead. The company expanded its zinc capacity and increased the lead capacity further. It is also increasing its wind power capacity by 150 mw capacity to 273 mw. The additional capacity is likely to be operational by September 2011. With the trials of additional silver production completed, the company is poised to manufacture 500 tonnes of the metal by FY12. Meanwhile, the company is expected to report 18-20 per cent growth in revenue this year and the next coupled with 20-22 per cent growth in net profit.
| GATHERING STEAM | |||
| In Rs crore | Q3FY11 | Q3FY10 | % change |
| Zinc production (tonnes) | 178,254 | 148,126 | 20.30 |
| LME* Zinc price ($/tonne) | 2,315 | 2,211 | 4.70 |
| Net sales | 2,601 | 2,217 | 17.30 |
| Ebitda | 1,507 | 1,386 | 8.80 |
| Ebitda margin (%) | 57.90 | 62.50 | -460 bps |
Valuations
At Rs 1,337, the stock is currently trading at 10 times it FY12 estimated earnings, which is reasonable considering the decent growth and huge cash on the books. At five times its estimated FY12 enterprise value to the operating profit, the per share value comes to Rs 830 per share. Adding another Rs 665 on account of the cash and cash equivalents (till FY13) gives a fair value of about Rs 1,500 per share.