Hindustan Zinc Q1 performance beats expectations but cost pressures weigh

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    Net profit for the quarter was at 3,092 crore, up 55.9% year-on-year (y-o-y) and 5.6% sequentially. A Bloomberg poll of analysts had estimated June quarter profit at 3,029 crore.

    Zinc prices on the London Metal Exchange (LME) averaged $3,915 a tonne during the quarter,  up 34 % on year and 4% sequentially. This helped company tide over the softness in lead and silver prices, which fell 6% each sequentially. Silver prices fell 15% year-on-year, though lead rose 3%.

    Higher mined metal production, up 14% y-o-y, also helped, with zinc production and sales volumes rising on year.

    Better volumes and realisations, and favourable exchange rate helped support operating performance too. Ebitda for the quarter at 5,278 crore rose 48.3% y-o-y, and was better than Bloomberg estimate of 4,949 crore.

    Sequentially Ebitda was up 5.4% on account of higher zinc prices.

    Cost of production (CoP), however, remains a cause of concern. The CoP was affected largely on account of higher coal prices, input commodity inflation, lower domestic coal (linkage) availability, partially offset by higher volume, better sulphuric acid realisations and improved recoveries.

    Zinc cost of production before royalty came at $1,264 ( 97,423) per tonne for the quarter, up 18.1% y-o-y and 11.3% sequentially.

    The CoP run rate remains much higher than $1,125-1,175 per tonne that remains a cause of concern. Coal prices are coming down but not at the rate at which metal prices have fallen. The company management is working on increasing productivity and usage, coal linkages and so on. 

    Linkage coal supplies may increase, but only from second half which will provide some respite.

    In addition to the CoP, volatility in LME prices added to uncertainties. The management does not expect too much decline from current levels, but investors will remain watchful.

    The company resorted to some bit of strategic hedging and sold forward total 21% of expected zinc production for FY23. But for the foreseeable future, the situation remains dynamic given the volatility.

    Analysts at Motilal Oswal Financial Services have raised their net sales assumption by 1% to factor in the 21% zinc volumes hedged at $4,100 per tonne.

    The company, however, has maintained its production guidance which should provide some confidence. Mined metal output is expected at 1,050-1,075 kt, and refined metal production in the range of 1,000-1,025 kt. This should support volume growth.

    Revenues from operations during the quarter was at 9,387 crore, up 43.7% y-o-y.

    “Hindustan Zinc delivered best first-quarter production for mined metal, refined metal & silver. With the exit run-rate for both mined & refined metal crossing over 1 million tonnes, we are fully geared to deliver another stellar performance this year,” said Arun Misra, CEO.

    The board has approved setting up of a fertilizer plant and an additional roaster. The project will be likely completed in about two years.

    While Hindustan Zinc has reported better-than-expected performance, investors will do well do monitor LME prices going forward. 

    Analysts at MOFSL have cut FY23 LME assumption for zinc to $3,486 per tonne from $3,571 earlier.

    Shares were under pressure on Friday, having closed 1.5% higher on Thursday.

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