It’s all in the price, is what investors appear to be saying in reaction to Hindustan Zinc Ltd’s (HZL) relatively good results, and announcement of the bonus and stock split ratios.
HZL’s shareholders owning one share of Rs10 will now have four shares of Rs5 each. Still, HZL’s price fell by 0.8% on Wednesday, compared with a 0.6% drop in the broad market, and a 1.8% increase in the BSE Metals index of the Bombay Stock Exchange.
Its performance appears sluggish compared with last year. The company’s main revenue is from selling zinc, silver and lead. Revenue rose by 17% to Rs2,630 crore in the December quarter, compared with the year-ago period, but its costs rose by 30%, due to higher operating, royalty and power costs.
Its margin fell by 4 percentage points, and net profit rose by just 12%. But this was the case in the September quarter, too, when its margins fell by nearly 8 percentage points. Higher depreciation due to its capital investments also affected profit growth. The year-on-year growth numbers should not be a surprise.
On a sequential basis, however, the firm’s December quarter looks better, with revenue rising by 19% and margins improving by 12 percentage points. Its net profit has risen by 36%.
HZL’s volume growth is healthy over the year-ago period, with zinc output up by 20%, but temporary closure of two lead smelters led to a 30% drop in lead production. Silver output was down by 0.3%.
On a sequential basis, zinc production was up by 1%, while the other metals showed a decline. What came to its rescue were higher realizations, as LME zinc and lead prices during the quarter were about 15% higher on a sequential basis, while silver futures are up by 39%.
Current LME zinc prices are up by 13% since 1 December, and if they sustain these levels, will result in higher realizations in the current quarter.
The company will start trial production at a new 1.5 million tonnes zinc smelter in the current quarter, which will contribute to higher output next fiscal. That will impact margins and see higher depreciation costs, as the plant will take time to stabilize. Volatile commodity prices are another risk. If they fall as sharply as they have risen in 2010, then HZL’s performance could get affected, which might explain the market’s reaction to the results.
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