Hindustan Zinc dividend payout offsets dull Q2 results
Hindustan Zinc shareholders must be holding on to hope that the dip in the performance in the September quarter is temporary
Hindustan Zinc Ltd has decided to pay out a sizeable dividend of ₹20/share in the September quarter. The payout is substantial at ₹8,450 crore, with ₹5,486 crore going to parent company Vedanta Ltd, ₹2,493 crore going to the government, which is the second largest shareholder and the rest to other public shareholders. The government will also get a sizeable dividend distribution tax, of about ₹1,738 crore.
While it has substantial cash in its books—₹23,304 crore as of 30 September—its performance in the first half has been disappointing. While the dividend will add to the government’s finances, the promoters also stand to gain. Vedanta Ltd said it too plans to consider an interim dividend at its upcoming board meeting to declare results. Vedanta’s promoters own a 50.1% stake in the company. The dividend received from Hindustan Zinc, along with any additions Vedanta may make, is likely to be passed on to its shareholders. The government will earn a dividend distribution tax on this amount also.
Hindustan Zinc’s dividend translates to a yield of 7% based on Monday’s closing price, and may have held up its shares despite a decline in its earnings in the September quarter. Since Hindustan Zinc’s production numbers were declared earlier, its sales numbers were not really a surprise.
During the quarter, its refined zinc production declined by 5% sequentially while revenue declined by 18%. Zinc output was affected by a temporary mismatch in zinc mined metal, the company said. Instead, lead output increased because of its higher availability in mined output. While sales contribution from lead increased but that was not enough to compensate for lower zinc revenue.
Hindustan Zinc’s sales declined by 10% sequentially but its costs fell by only 6%, chiefly due to an increase in employee costs, and because expenses did not fall as much as sales did. That led to a 14% decline in its Ebitda in the September quarter, and Ebitda margin narrowed both sequentially and year-on-year. Ebitda, or earnings before interest, taxes, depreciation and amortisation, is a measure of profitability.
Hindustan Zinc’s management said they expect production in the second half to pick up, with refined zinc metal output returning to more normal levels. That’s why it expects full year refined metal output to be slightly higher in FY19, although the first half shows a 7% decline over a year ago. This projection is based on its assessment of the progress of its underground mining programme and implementation status of various projects.
While higher output and sales is one factor, realisations and costs are other variables to be looked at. Volatility in metal prices has introduced an element of uncertainty, especially as metal prices have become a casualty in the global trade wars. Non-availability of adequate coal linkages has also added to Hindustan Zinc’s costs. These factors too will determine the extent to which Hindustan Zinc’s earnings recover in the second half. In the September quarter, net profit was down by 5.4% sequentially and by 29.6% over a year ago.
Hindustan Zinc’s shareholders must be holding on to hope that the dip in its performance is temporary. Next quarter onwards, they will want to see both volumes and margins improve on expected lines.