The recent decline in zinc volumes is expected to be recouped in coming months. The increase in silver and lead volumes and likely bottoming of zinc and lead prices will drive growth in the current year
With metal prices on the London Metal Exchange (LME) plummeting in the backdrop of global demand concerns, metal stocks have felt the heat. Hindustan Zinc, too, has corrected 20 per cent from its 52-week highs of Rs 149.80 on 17th February 2012, partly due to the anticipated reduction in output which is reflecting in the muted June quarter results.
Positively, zinc and lead prices seem to be bottoming out. Also, even as the company’s zinc volumes may remain flat during FY13, the ramped-up lead and silver refining capacities (in FY12) are likely to boost its performance in the current year. The rupee’s depreciation has also provided some cushion. Thus, analysts expect good performance in FY13-14.
| PROFITABILITY TO IMPROVE | |||
| In Rs crore | Q1’ FY13 | FY13E | FY14E |
| Net sales | 2,748 | 12,549 | 13,765 |
| % change y-o-y | -2.6 | 11.5 | 9.7 |
| Ebitda | 1,429 | 6,852 | 7,678 |
| % change y-o-y | -8.8 | 12.9 | 12.1 |
| Ebitda (%) | 52.0 | 54.6 | 55.8 |
| Net profit | 1,581 | 6,470 | 7,541 |
| % change y-o-y | 5.5 | 16.2 | 16.6 |
| EPS (Rs) | 3.7 | 15.3 | 17.8 |
| PE (x) |
– | ||
Based on their estimates, Emkay Global’s analysts see the company’s profits rising 14-15.4 per cent during FY13 and FY14. Notably, the company has a high cash balance (about Rs 46 per share, or Rs 19,404 crore, as on June-end), which makes the stock attractive at current levels of Rs 116.
Ravindra Deshpande at Elara Capital says even with declining LME price, Hindustan Zinc has reported Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins well in excess of 50 per cent. He values Hindustan Zinc at six times FY13 estimated enterprise value/Ebitda and arrives at a target price of Rs 155 per share. Consensus target price as per Bloomberg data stands at close to Rs 140, which indicates an upside of 20 per cent from current levels.
Subdued volumes
Even as Hindustan Zinc increased its mining capacity from 9,750,000 tonnes per annum (TPA) in FY11 to 10,250,000 TPA in FY12, the first quarter of FY13 saw lower zinc volumes. Thanks to the company’s mining plan, the output from the Rampur Agucha mines reduced as lower grade ore was being mined. This was partly offset by higher production from its other mine (Sindesar Khurd), which restricted the fall in zinc volumes (at 161,000 tonnes) to 15-16 per cent (both sequentially and year-on-year).
With higher grade ore expected to be mined at Rampur Agucha mines in the second half of FY13, the company is confident of making up for the volume loss. It has guided for zinc production remaining flat in FY13. A few analysts, though, are sceptical and expect volumes to be lower (Edelweiss estimates a 6.5 per cent fall) in FY13. Hence, this remains a key monitorable.
In the lead business, the newly commissioned smelter in FY12 helped boost the refined lead volumes. The company had increased its lead smelting capacity from 93,000 TPA in FY11 to 1,85,000 TPA in FY12. The higher production from the Sindesar Khurd mine helped silver volumes, too. Lead and silver volumes at 29,000 tonnes and 73,000 kg, respectively, in the June quarter thus were up 95.9 per cent and 84.4 per cent year-on-year (sequentially though they were down 17.1 per cent and 9.9 per cent, respectively due to the cut in output).
June 2012 quarter
Even though average zinc and lead prices on the LME were at $1,938 a tonne and $1,989 a tonne, respectively, 4-5 per cent lower sequentially, the rupee depreciation offset some of the impact on realisations for Hindustan Zinc. Thus, despite lower volumes, revenues declined only 2.6 per cent y-o-y and by 12.4 per cent sequentially.
On the operating front, lower output from the Rampur Agucha mines meant slight increase in costs and some impact on Ebidta, which may also be seen in the second quarter. Analysts, though, do not see it as a major cause of worry as during the second half of FY13 when production of higher grade ore starts, the cost of production is also expected to reduce.
Some mark-to-market gains of Rs 120 crore pushed up miscellaneous income 59 per cent and provided a boost to the bottom line as lower taxes, too, provided some relief. Thus, net profit at Rs 1,495 crore increased 11.3 per cent year-on-year and 3.4 per cent sequentially.
Outlook
While zinc volumes may have declined in the quarter, the same are seen recovering in the second half. The company is likely to drive benefits out of expansions undertaken in FY12 wherein lead and silver smelting capacities have grown two-fold and three-fold, respectively (silver refining capacity increased from 180 TPA to 518 TPA). The company produced 82 tonnes of silver in the June quarter and has guided for 350 tonnes of production during FY13, which is significantly higher than 205 tonnes produced in FY12.
While global zinc demand is growing five per cent, the company sees the demand in India growing at 8-10 per cent. The rupee’s depreciation of 13 per cent since the start of 2012 is to some extent cushioning the lower LME prices (12-14 per cent) for zinc and lead. What’s equally important is that the prices seem to have bottomed out and management during the conference call post results attributed this to the supply side shortage globally that is likely to further intensifying in FY14.
In the long run, Hindustan Zinc is working on ramping up productions further by developing underground mining operations at Rampur Agucha mines and developing a greenfield Kayar mine. Both the mines are expected to start commercial production in FY14.
