Despite dull business, downside limited for Hindustan Zinc stock

Lockdown and labour shortage have impacted the supply chain and annual guidance remains deferred till the end of June’20 quarter
Hindustan Zinc managed to report stable volumes for the March quarter (Q4FY20), but its performance was pulled down by low zinc and lead prices.

On the London Metal Exchange (LME), the prices (per tonne) of zinc at $2,128 and lead at $1,847 were down 21 per cent and 9 per cent year-on-year, respectively, in Q4. It was the mined metal production, which despite the lockdown was up 2 per cent year-on-year at 249,000 tonnes, on the back of better ore grades that provided a cushion.

As a result, revenues at Rs 4,391 crore, despite being down 20 per cent year-on-year in Q4, were ahead of the consensus estimate of Rs 4,336 crore.

On the operating front, while lower zinc and lead realisations impacted profit, cost of production in the zinc business, too, jumped 7 per cent year-on-year. Higher raw material costs and lower acid credits offset the benefits arising from lower coal and employee expenses. Thus, operating profit declined 30 per cent year-on-year, and the net profit at Rs 1,339 crore (down 33 per cent year-on-year) missed estimate of Rs 1,394 crore.

Moving forward, while per tonne zinc prices have rebounded to $2,000 now from $1,843 at the start of April'20, they are still lower than the January-highs of $2,466. Analysts at Emkay Research have already cut LME zinc price assumptions by 21 per cent and 20 per cent, and lead's by 30 per cent and 29 per cent for FY21 and FY22, respectively, as demand in major global economies remains weak.

With prices subdued, volume support remains crucial. Though the company managed to maintain the production exit-rate of 1 million tonnes per annum (MTPA) at end-FY20, and says all key projects for achieving 1.2 MTPA are complete, it has refrained from giving volume guidance for FY21 post March quarter results. Lockdown and labour shortage have impacted the supply chain and annual guidance remains deferred till the end of June’20 quarter.

Against this backdrop, FY21 earnings remain at risk. Analysts at Antique Stock Broking, Kotak Institutional Equities and Emkay Research estimate FY21 earnings to decline between 21 per cent and 29 per cent.

While JM Financial, too, estimates FY21 earnings to plunge 43 per cent, it is positive on the stock. “We remain positive on HZL given its presence in the lower end of the global cost curve facilitated by high grade captive mines sufficient to meet requirements for decades, captive power plants, sizeable scale, diversified revenue stream with increasing contribution from

silver sales and strong balance sheet (Rs 13,800 crore of cash; Rs 33 per share),” it said.

The stock, which has declined more than 14 per cent from May highs, may also find support due to the high dividend yield of 10 per cent and cheap valuations. With major expansions over, FY21 capex needs are lower too. Limited avenues to deploy cash will ensure that the company keeps returning cash, says Credit Suisse.


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