Hindustan Zinc’s Q3 glow dulled by increase in cost


Hindustan Zinc Ltd’s metal output increased sharply in the December quarter, in line with its projection of a higher output in the second half of FY17. Selling more metal when prices have risen is a healthy combination.

However, while higher output should mean a lower per unit cost, Hindustan Zinc’s cost has actually risen.

Some of that is one-off in nature but some of it is also due to higher coal and mine development costs. That makes the company more vulnerable to a downtrend in metal prices.

The company’s mined metal output rose by 43.8% sequentially due to higher output from the open cast mines at Rampur Agacha. This was expected as it had guided for higher output in the second half, even as the first half underperformed. Full-year zinc output in FY 17 will be lower than FY16 due to the first half’s lower output. It also plans to sell some mined metal in the fourth quarter.

The company’s sales rose by 43.6% sequentially to Rs4,944 crore, and would have been higher but for sales from silver showing a flat trend.

Hindustan Zinc’s cost of production rose by 7.2% in rupee terms to Rs58,067 per tonne and by 6.4% in dollar terms to $861 per tonne. The company management said one main reason was one-time charge due to an increase in the ore-waste ratio, or how much material it has to excavate to extract a given quantity of ore.

While a part of the increase may be one-time, higher underground mine development and higher coal costs are more permanent factors. So, some increase in the cost of production appears to have set in. Its operating profit margin fell sequentially by 3 percentage points to 55.9%. On a sequential basis, its power and fuel cost tripled, partly due to the increase in output and to higher coal prices. Hindustan Zinc’s net profit rose by 22% sequentially and by 26.1% over a year ago. That met the Street’s expectation.

The company’s expansion plans continue both on the mining and metal fronts. While the fourth quarter is expected to be better in terms of output, the plan for FY18 will be revealed after the Q4 results.

What is going in its favour is higher output and firm zinc prices. The outlook for prices remains bullish, as of now. The increase in costs should give cause for concern.

External events to watch for are a special dividend—the government apparently is keen on one—and a sale of the government’s stake in the company. The stock fell by 0.9% the day it announced its results.

That could either be a pull-back after a sharp increase of about a fifth in its price over three months ago, or some concern over rising costs.

It trades at a price to earnings multiple of 13.6 times its estimated FY18 earnings per share, based on the mean of estimates polled