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Hindustan Zinc: A good defensive play in the volatile commodity market

Current valuations based on enterprise value at 7.8 times its estimated operating profits of FY19 are quite reasonable and supportive especially in the light of 25% return on equity, zero debt and cash of about Rs 23,000 crore in the books.

October 23, 2018 / 01:23 PM IST
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For metal companies, volatility in international metal prices and a weak rupee often have a huge bearing on financial performance. Hindustan Zinc is among the first ones to have declared their Q2 FY19 earnings in the metals space. It reported a 20 percent year-on-year decline in zinc sales to Rs 3,131 crore.

During the quarter gone by, refined zinc production declined 16 percent to 1,62,000 tonne. The company also faced pressure because of lower zinc prices on the London Metal Exchange, which dropped to $2,537 a tonne in Q2 as against $2,963 tonne in the corresponding quarter last year.

Nevertheless, other segments compensated. Silver reported an 8 percent revenue growth as a result of strong 23 percent increase in production to 172 tonne, despite lower LME prices (down about 11 percent).

Lead business, which constitutes 17 percent of revenue, saw a 24 percent increase in sales as a result of robust 30 percent growth in saleable lead volumes to 49,000 tonne.

Operational hiccups

While other segments helped in lowering the impact, zinc, which accounts for 65 percent of revenue, being a major contributor impacted operating profit as well.


Lower zinc production and a depreciating rupee (two-third of cost is dollar based) impacted cost, which jumped 14 percent to Rs 72,449 per tonne during Q2.

This is precisely the reason why the company a reported 24 percent YoY decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs 2,315 crore. While operating performance deteriorated, reduction in other income (treasury income on cash and investments of about Rs 23,000 crore) by 16 percent to Rs 394 crore further impacted profits. This also explains why its reported net profit declined 30 percent to Rs 1,815 crore.

Outlook and valuations

The management remains positive about performance in the second half of the current fiscal as it aims at higher zinc volumes, coupled with a reduction in overall cost.

It is expecting production cost to reduce to about $950-975 a tonne, as against $1,034 a tonne in Q2 FY19, led by higher volumes and possible savings on fuel cost.

The management is aiming at volumes of about 1.1 million tonne of zinc and lead this fiscal. In the first half of FY19, it achieved a combined production level of about 4,44,000 tonne. The required run rate is about 2,50,000 a tonne per quarter, which it believes is fairly achievable given the ramp-up in production at various mines.

In terms of realisations, zinc prices on the LME are currently hovering around $2,695 a tonne, which is well above its Q2 average of $2,537 a tonne. Considering the low inventory and tight supply, zinc prices are expected to remain stable.

Current valuations, based on an enterprise value of 7.8 times its estimated operating profits of FY19, are quite reasonable and supportive especially in light of the 25 percent return on equity, zero debt and cash of about Rs 23,000 crore on its books. This cash is pre-dividend. The company declared a huge dividend of Rs 20 per share in Q2, which give us a dividend yield of close to 7 percent on its current market price of Rs 281 a share.

For more research articles, visit our Moneycontrol Research page

Jitendra Kumar Gupta Principal Research Analyst

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