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The impact of lower mined metal output and soft-base metal prices was visible on Hindustan Zinc’s March quarter performance. While net sales (Rs 3,589 crore) and net profit (Rs 1,881 crore) marked a 6.8 per cent and 13.1 per cent decline year-on-year, respectively, these had been factored in by the market looking at the production numbers declared earlier. Sales and profit were higher than Bloomberg estimates of Rs 3,513 crore and Rs 1,810 crore, respectively. These, with the final dividend of 95 per cent (Rs 1.9 a share), helped the stock close half a per cent higher at Rs 132.2 on Monday.
Though part of the profit outperformance can be attributed to a lower tax rate of 11.2 per cent (versus 15 per cent a year ago), the overall performance was healthy. Volumes and prices are expected to inch up. Zinc prices have improved and analysts say base metal prices will improve further. Of 14 polled on Bloomberg starting March, 13 have a buy, with a consensus target of Rs 154 indicating more than 16 per cent upside.
The mined metal output at 200,000 tonnes during the quarter was 23 per cent lower year-on-year. The company attributed the lower output in the second half of FY14 to slower-than-expected scaling of underground mining projects and to the change in mining sequence with preference given to primary mine development than ore output. Thus, refined zinc output was flat at 182,000 tonnes, lower than 196,000 tonnes in the December quarter. Analysts at Kotak Institutional Equities say the firm treated external lead concentrates during the fourth quarter, which contributed 7,000 tonnes of lead and 24 tonnes of silver. Refined lead output at 38,000 tonnes rose 10 per cent year-on-year and 41 per cent sequentially. But, total refined saleable silver at 91,000 tonnes was still 16 per cent lower year-on-year, though higher than 73 mt in December 2013.
While output remained lower, the soft-base metal prices added to woes. Bhavesh Chauhan at Angel Broking says the average zinc, lead and silver prices diiped one per cent, eight per cent and 32 per cent year-on-year, respectively. Though this was partly offset by the 14 per cent rupee fall, the cost of zinc output rose 24 per cent year-on-year to Rs 55,467 a tonne, adds Chauhan and, against the backdrop the earnings before interest, taxes, depreciation, and amortisation (Ebitda), dipped 17 per cent year-on-year to Rs 1,755 crore.
The company’s output forecast is awaited. Analysts say this should gradually improve. The base metal prices are expected to be better compared to FY14 though in the near to medium term subdued Chinese demand may keep them range-bound.
Ashish Kejriwal of Elara Capital says the FY15 earnings are expected to be driven by higher prices. Analysts at Citi have their FY15 forecast of average zinc prices at $2,095 a tonne and $2,263 in FY16 compared to $1,909 in FY14. They had increased their Ebitda six and two per cent for FY15/FY16. The company, by the analysts, is a ‘valuation’ winner in their universe, trading 1SD (standard deviation) below its enterprise value/Ebitda mean and is inexpensive versus peers. Cash and bank balance is more than 45 per cent of its market cap, the stock available at a three per cent dividend yield, and a potential sale of the government’s 29.5 per cent stake (thereby removing the overhang) make them positive.
Chauhan at Angel Broking has a buy, without taking into consideration the government’s stake sale, an event that could lead to strong rise of the stock.
