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HZL volumes may shift gears, but zinc prices need to play their part

  • The benefits of higher volume growth, operating leverage may be limited if zinc prices are under pressure
  • Despite lower inventories, weak global growth may keep zinc prices subdued

Hindustan Zinc Ltd’s (HZL’s) Q1 results did little to cheer investors. Its stock has been on a downward spin this calendar year, and it seems like the zinc cycle overhang could persist.

Mined volumes declined 13% in Q1 of FY20 against the previous quarter. Refined volume output, too, declined by about 3% quarter-on-quarter. As a result, revenue was down about 8% sequentially and 6.3% year-on-year.

Operating costs were on the rise, chiefly due to rising power costs. Consequently, operating profit declined by about 8.7% year-on-year to 2,477 crore.

Q1 growth has also been a setback. Efforts to ramp up production were marred by power supply constraints. The management, though, is optimistic about a volume increase, and is targeting overall volumes of about 1 million tonnes for FY20. A production bottleneck has been cleared at its Rampura Agucha plant, which should help raise the output.

International zinc prices, though, have been largely subdued. Despite lower inventories, weak global growth may keep zinc prices subdued.

(Graphic: Satish Kumar/Mint)
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(Graphic: Satish Kumar/Mint)

Analysts have penciled in lower international zinc prices and have cut back on operating profit estimates. “We have revised our LME zinc price assumption to US$2,566 a ton for FY20, from US$2,713. This would result in a 10%/1% lower Ebitda estimate for FY20/21," said analysts at SBICAP Securities Ltd in a note to clients. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Power costs are a significant variable for the company. On that front, the latest increase in power tariffs is another dampener that could curtail profitability. The management said the Rajasthan government has increased electricity duty by about 60 paise a unit, which, if not reversed, could raise the cost of production by about $35 a tonne.

In this backdrop, though, shareholders may have to be content with a dividend yield of 6-7%. The benefits of higher volume growth and operating leverage may be limited if zinc prices are under pressure.

The outlook here is not all that positive. Zinc supply is rising and the global slowdown is leading to lower demand. The silver lining, however, is that inventories are also low.

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