Hindustan Zinc: It’s all in the price
Hindustan Zinc Ltd’s plan to produce 17% more metal in fiscal year 2018 (FY18), even as it expects the global zinc supply position to remain tight, should be good news for investors. Tempering this good news is the recent decline in metal prices.
All industrial commodities have come under pressure in the past 30 days. Concerns revolve around China, where economic growth has been better than expected but there are worries around metal-intensive sectors such as construction. This is the main risk that the company’s investors have to keep an eye on.
In the March quarter, Hindustan Zinc’s mined metal output rose by 13% sequentially, while that of refined lead and zinc combined rose by 6%. Realizations were in its favour, as zinc prices rose by 10% on an average, while that of lead rose by 5.5%. Revenue rose by 25.5% in the quarter to Rs6,756 crore, while operating profit increased by 34.7%. Net profit rose 12.2% sequentially and by 42.3% over a year ago.
Hindustan Zinc plans to tweak its existing smelting capacity so that it can produce more metal. It has carried over 80,000 tonnes of mined metal into FY18, after selling some in the market. The company intends to invest $350-360million in FY18 towards enhancing metal capacity and mine expansion, among others. The more refined metal it sells, compared to selling concentrate, the more money it makes.
The first half of FY17 had seen lower mined output, as per Hindustan Zinc’s mining plan. While that will mean the first half financials of FY18 will look good year-on-year, the correct factor to look at will be how the company does on a sequential basis.
While metal output is expected to be higher in FY18, it has also cautioned that the cost of production in dollar terms could increase slightly, because of higher coal and input prices. These could be concerns, but only if metal prices don’t recover from their current decline. Zinc prices are nearing their lowest levels seen in 2017 so far, and are down by 14.7% from peak levels during the year. An appreciating rupee against the dollar is not good news either for Hindustan Zinc.
The company’s share trades at 14 times its FY17 earnings per share and rose by 4% on Thursday as its results were much better than what the Street was expecting. The projected increase in its metal output puts Hindustan Zinc on a strong footing for FY18 but the shift in the trend in metal prices puts a question mark on earnings growth. Once prices settle into a trend, its share will follow suit.