Hindustan Zinc: Q1 profit up despite lower production

Jitendra Kumar Gupta Moneycontrol Research

On an average, zinc prices on the London Metal Exchange (LME) traded 29 percent higher year-on-year to $3,112 per tonne in the quarter-ended June. One major beneficiary of this uptick has been Hindustan Zinc, which reported a 16 percent YoY increase in Q1 FY19 sales to Rs 5,310 crore. Growth would have been higher had there not been reduction in production of zinc.

In Q1, refined zinc production fell 11 percent YoY to 172,000 tonne. While zinc accounts for over 70 percent of revenue, others segments partly compensated. Despite silver prices on the LME trading around 4 percent lower, HZL reported a strong 36 percent revenue growth led by 20 percent increase in production to 138 tonne. Similarly, its lead business (14 percent of revenue) saw a 37 percent increase in sales as a result of 11 percent growth in LME prices and 20 percent growth in saleable lead volumes to 42,000 tonne.

Low operational benefits
In terms of profitability as well, lower zinc production impacted cost. Cost of zinc production before royalty grew 11 percent as a result of lower production volumes due to open cast closure and increase in prices of metcoke, coal and diesel by about 20 percent.

Part of this cost pressure was negated because of strong volume growth in other segments. This is precisely the reason why the company reported only a 17 basis points reduction in earnings before interest, tax, depreciation and amortisation (EBITDA) margins to 52.96 percent. Operating profit grew 15.8 percent.