Hindustan Zinc needs a sign, a reversal in metal prices will do1 min read . Updated: 24 Jul 2018, 12:49 PM IST
If bad news on the business front was not enough, Hindustan Zinc's mark-to-market losses due to higher interest rates also saw other incomes decline sharply
That Hindustan Zinc Ltd’s performance would dip compared to the March quarter was well known, but the extent of decline was a surprise. The company’s revenue fell by 15% sequentially, its Ebitda (earnings before interest, tax, depreciation and amortization) dropped by 25%, while its net profit declined by 23.4%.
A host of factors contributed to the decline. Metal prices, for example, have been roiled by trade wars and fears of a slowing Chinese economy. The strengthening of the dollar also added to the pressure. Zinc prices on the London Metal Exchange were down by 9% sequentially, although they were up 20% over a year ago.
The bad news continues in this quarter as well, with prices down by 9.9% since end-June. However, the management appears confident that the prices will recover.
Hindustan Zinc has shifted to underground mining from open-cast mining. The closure of open-cast resulted in mined metal output declining by 9% sequentially, while refined zinc metal output fell by 17%. The situation, however, is expected to improve over the next three quarters. The management maintains that it will exit the year with a slightly higher output than last year.
Falling volumes contributed to higher cost per tonne, since fixed costs would have been spread across lower tonnage. Its cost of production rose sharply both from the year-ago period, as well as sequentially (see chart). At $1,043 per tonne, it is significantly higher than the company’s expectations of $950-975 per tonne range for FY19. The pressure on costs should be lower, as volumes improve. But a wage hike has added $33 per tonne to costs. Whether Hindustan Zinc gets more coal linkage supplies also needs to be seen.
If bad news on the business front was not enough, the company’s mark-to-market losses due to higher interest rates also saw other incomes decline sharply. All these factors contributed to the net profit rising by a mere 1.5% over a year ago and falling by 23.4% sequentially.
But, could things get better? Hindustan Zinc’s output is certainly expected to improve. However, the single factor that can turn around investor sentiment is a convincing reversal in the decline of zinc price, which can compensate for lower volumes and higher costs. Till that happens, its shares may continue to underperform. They are already down by 18% since end-April.