Hindustan Zinc Ltd’s (HZL’s) September quarter results at first seem quite ordinary, compared to what its production figures indicated. The company’s zinc output was up by 25%, lead output by 14% and silver output by 8.6%. Revenue rose by 21% to 2,201 crore year-on-year (y-o-y), due to its higher output and also higher product prices. Average zinc prices, for example, were up by 15% y-o-y on the London Metal Exchange.

But HZL’s net profit growth was flat, rising by just 1% over the year-ago period. Its operating profit margin fell by nearly 8 percentage points to 51% y-o-y. Operating expenses rose sharply, mainly due to its new smelter coming on stream.

The firm had commissioned a zinc smelter in the March quarter. New plants take time to stabilize and reach full utilization, and incur higher expenses during this period. This smelter contributed about 22% of its zinc output during the quarter.

Graphic: Yogesh Kumar/Mint

A 160MW captive power plant too is due for commissioning with the lead smelter. These new facilities will add to output, but will also result in higher start-up related costs, for a few quarters.

The impact will be visible not just on operating expenses, but also depreciation, as new assets are added to its balance sheet. In the September quarter, HZL’s depreciation cost rose by 50%.

But these are short-term effects. After the plants stabilize, revenue can be expected to rise at a faster rate than costs, while the base effect of lower costs will wane, leading to higher margins.

Its capacity is coming on stream, at the right time. As the global economy recovers, the outlook for commodities has improved. Zinc prices are up by nearly 36% from their June lows and are maintaining a steady uptrend. Lead and silver prices too are buoyant. Higher utilization of captive power will also lower its energy costs.

HZL’s 1% rise in net profit was greeted with a 0.8% fall in its share price, just a little worse than the 0.6% decline in the broad market, though much better than the 2.2% fall of metal sector stocks.

Consensus estimates for HZL do factor in limited profit growth in fiscal 2011 and fiscal 2012. But its price to earnings multiple of 27 times its 2012 estimated earnings appear to indicate that the market is discounting earnings growth expected beyond fiscal 2012. Or, investors are expecting commodity prices to rise further, adding more fat to HZL’s profits.