Hindustan Zinc Ltd’s operating profit rose by 30% in the March quarter on a quarter-on-quarter (q-o-q) basis, delivering a pleasant surprise to investors. Zinc and lead prices have been firm, rising by 3.4% and 9% q-o-q, respectively. This is good, but it still does not explain the sharp jump in profits. Higher production, sales (and realizations) of silver and better operating efficiencies aided the company’s performance.

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In the March quarter, the company’s zinc output rose by 8.5%, lead by 22.3% and silver by 18.5% q-o-q. Zinc output has risen due to higher capacity utilization of its new smelter. Lead output recovered after falling in the December quarter due to maintenance shutdown. It will improve further after a new lead smelter is commissioned in the current quarter. Average metal prices moved up, with zinc prices rising by about 3%, lead by 9% and silver surging by nearly 19%.

Silver is clearly driving the company’s performance. This is also because of a 41% rise in the production of lead concentrate in the March quarter. This concentrate contains silver, which also enhances realizations. In fiscal 2011 (FY11), silver’s sales rose by 58% to 544 crore and are expected to rise sharply in FY12 as well.

Hindustan Zinc’s metal output is expected to increase further in FY12. Its 1.5-million-tonne Sindesar Khurd zinc mine is expected to achieve full capacity and will exit the year with a silver production capacity of 500 tonnes.

The company’s sales in the March quarter rose by 23% q-o-q, and control over expenditure led to its operating profit margin improving by nearly 3.5 percentage points to 61%. Higher other income due to rising yields also contributed to its net profit rising by 37%.

Its share price rose by 3% on Thursday, as investors cheered its better-than-expected results. Investors would also do well to study the International Lead and Zinc Study Group’s forecast for 2011. It expects global demand for refined zinc to increase by 6.3%, and production to rise by 5.6%. The group expects the market to remain in oversupply, with a surplus of under 200,000 tonnes. Refined lead production is expected to increase by 5.5% in 2011 and supply by 6.1%, which will cause an oversupply of about 123,000 tonnes. Any sustained softening of non-ferrous metal prices and silver should be reason for worry. Hindustan Zinc will benefit from higher metal production in FY12, but will also remain sensitive to weak trends in metal prices. Compared with 31 March, zinc and lead prices on the London Metal Exchange are down by about 0.5% and 3.4%, respectively, while silver prices are up about 17%.

Graphics by Yogesh Kumar/Mint

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