New capacities additions at Hindustan Zinc Ltd (HZL) are coming up at the right time. After slumping in 2008, prices of metals such as zinc and lead have risen sharply on the London Metal Exchange.
In the March quarter, HZL’s net sales nearly doubled to Rs2,498 crore over the same period a year ago and grew by 13% sequentially. Its refined zinc production was flat while that of lead rose.
Revenue growth was boosted by a 94% increase in zinc and a 91% increase in lead prices, on an average, in the March quarter versus a year ago. Higher sales of zinc concentrate, lead concentrate and silver also helped.
Though HZL’s expenses rose by 40%, margins improved as sales grew faster. Employee costs, royalty and general expenses were the key contributors to higher expenses. The operating profit margin fell slightly compared with the December quarter as a result. Despite higher depreciation, lower other income and higher interest costs, net profit rose 124% to Rs1,239 crore.
Though HZL’s performance is mainly due to rising commodity prices, its capacity expansion plans will give sustainability to growth. On 28 March, its 210,000-tonne zinc smelter started production, hiking its total refined metal capacity by 28%. Its Sindesar Khurd mining expansion project, to increase capacity from 0.3 million tonnes to 1.5 million tonnes of ore production, is expected to be commissioned in the June quarter. Its 100,000-tonne lead smelter project will be completed in the September quarter. As they stabilize, their contribution will be visible partially in fiscal 2011 and in fully in 2012.
Initially, the impact of these capacity additions will be to see expenses rise and contribute to higher depreciation, affecting operating profit margins, which is inevitable. But higher volumes will contribute to absolute growth in sales and profits, due to higher price realizations. But for this expansion, with production flat in its existing operations, HZL’s growth would have flagged in 2011.
Zinc and lead prices are unlikely to increase as much as they did in fiscal 2010, but global economic growth and rising demand from faster growing emerging economies is expected to provide a fundamental basis for prices to remain steady. One key risk to the price outlook is if the global capacity idled in the downturn is restarted.
HZL has the added benefit of a growing domestic market for its products, as rising investments in power, automobiles and consumer goods augur well for zinc consumption. HZL’s share price was down by 0.6% on Thursday. It trades at a price to earnings multiple of around 13 times fiscal 2010 earnings per share and around 10 times its consensus 2011 earnings per share.
HZL’s ability to ramp up utilization in its new units holds the key to its valuation, as the low base effect of lower metal prices on its profits will fade in fiscal 2011.
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