Covid-19 hits Hindustan Zinc’s Q1 earnings; silver prices may aid revival2 min read . Updated: 22 Jul 2020, 10:34 AM IST
- Hindustan Zinc's revenue dropped 20% from the year ago quarter as the company lost 18 days of production equivalent in April
- The management expects to benefit from fall in global zinc mine production—projected to drop 5% in FY21 versus an expectation of 4% growth earlier
Hindustan Zinc Ltd’s June-quarter performance was weak, reflecting the impact of the lockdowns. Its revenue dropped 20% from the year-ago quarter. In April, it had lost the equivalent of 18 days’ production.
Mined ore and refined metal production dropped from the year-ago quarter. Combined with the 11-29% fall in lead and zinc prices, the June quarter operating earnings declined 36%. The results are broadly in line with Street expectations. Further, the management talked about improvement in the business environment, which helped the stock gain 4% during Tuesday morning trade.
The 10% rise in silver prices was a bright spot in the June quarter. With the company’s sizable silver inventories, the firm silver prices augur well.
“Silver sales volume in Q1 FY21 was 146 tonnes compared to production of 117 tonnes with a liquidation of inventory built up in Q4 FY20," Antique Stock Broking Ltd said in a note. The firm expects to produce 650 tonnes of silver this fiscal year, up from 610 tonnes in the previous year (FY20). With silver prices firm, higher production can boost Hindustan Zinc’s earnings.
But silver generates less than 15% of its revenue. A large part of its revenue arises from zinc and lead. Here, the outlook is mixed. The company plans to produce 925-950 kilotonnes (kt) of mined ore and finished metal in FY21, up from 917 kt in the previous financial year. Zinc and lead prices have recovered from recent lows, but are still lower than the year-ago levels. To counter low realizations, it is rationalizing costs. “Costs are expected to decline with greater operational efficiencies (mining shafts, higher automation and digitisation) and lower input commodity costs," the analysts at Antique Stock Broking said.
Further, the management expects to benefit from the projected 5% drop in global zinc mine production in FY21 versus earlier expectations of a 4% growth. Also, with China reopening, zinc inventories in the country are declining. These two factors can further support zinc prices, indicated the management during a call with analysts.
The company expects to see the benefits of the ongoing capital expenditure in the second half of this fiscal. While recovery expectations are aiding the stock, it did not elaborate on its fund-raising plans. Yet, the sizable cash on its books renders clarity on fund deployment even more important.
“Management did not elaborate on media reports regarding a potential bond issue. We believe that the bond issue could be used for capex, while the ₹1,550 crore cash in hand could be used to distribute dividends to holdco Vedanta Ltd, given high leverage at Vedanta Plc," Emkay Global Financial Services Ltd said in a note.