Slower volume growth may curb Hindustan Zinc's future dividend payout2 min read . Updated: 25 May 2020, 11:51 AM IST
- HZL’s cost-control measures to improve efficiency could alleviate cost pressures
- Completion of all mining-related expansions would begin to support cash-flows
Hindustan Zinc Ltd deferred its FY21 volume guidance to the next quarter even as covid-19 disruptions marred its volume-led growth. Volumes slipped in the fourth quarter due to the lockdown in end-March. This could lower cash flows in the coming quarters. Shares of HZL fell about 2.4% on Friday and the ongoing slowdown could continue to keep the stock under pressure.
While mining has been upbeat, sales of zinc were about 2% lower year-on-year. Sales of lead dropped 8%, while silver fell 25%. All this shows that demand for mined metals has shrunk despite just 10 days of the lockdown.
In the coming quarters, demand will be a key concern. With the economy contracting, end-users of zinc are slowing purchases.
“Outbreak of the pandemic has led to a massive fall in demand for zinc globally as end-user activities came to a halt. Zinc warehouse inventory continues to pile up as demand dries out faster than supply cuts. Current warehouse inventory stands at 223k tons vs 125k tons at end-Dec. While some green-shoots are visible in the economy as restrictions are being lifted gradually, complete demand revival is expected post-Q2 FY21," said J M Financial Institution in a note to clients.
HZL’s cost-control measures to improve efficiency though could alleviate cost pressures. The management aims at 5-10% reduction in costs in FY21. Besides, HZL’s completion of all its mining-related expansions would begin to support cash-flows. The company raised its mining capacity to 1.2 million tons per annum from 1 million earlier.
Globally, though, prices of zinc and lead have dropped. LME zinc prices have dipped about 21% y-o-y in Q4 to about $2,100 per ton on an average. In the coming quarters, prices are expected to remain soft, which caps the upside on cash flows generation. In fact, analysts see prices of about $1,900-2,000 a ton in the coming year.
Lower zinc realisations and lower volumes have impacted Ebitda margins, which dipped to 45% in Q4 against 51% in the year-ago period. Ebitda is earnings before interest, tax, depreciation and amortisation.
A silver lining for the stock is its high dividend yield. The company declared a dividend of ₹16.5 a share recently. Of course, investors must keep an eye out on volume growth as it will determine whether the high dividend payouts will continue in the coming year. HZL though has a reasonable amount of cash on the books at about ₹33 a share, according to analysts. Shares of HZL have dipped 34% in the past year.