In the last one year, the buoyancy in the metal prices led to commodity players reporting record level income and profitability. One such company in the Indian commodities’ space is Hindustan Zinc. Shares of the company rose 53 per cent in last 12 months at a time when zinc metal– in which the company has near monopoly in India- soared by almost 50 per cent.
At the current market price of ₹334.65 per share, the stock is valued almost eight times its trailing twelve month EBITDA (earnings before interest, tax and depreciation). This is close to the average of 7.71 times the stock was valued in the last three years. Based on the current fiscal earnings estimates (Bloomberg) however, it trades at eight times, lower to its three-year average of 8.5 times.
At the current valuations, investors can hold on to the stock as risk-reward appears reasonable. Steep correction in the metal prices is not expected in the near future.. Zinc’s fundamentals, company’s focus on cost control measures, and on ramping up of volumes are also likely to provide support.Its strong balance sheet is expected to provide a cushion in case of unexpected reversal in commodities prices.
The current dividend yield for the stock is 6.3 per cent. The company has a good track record of dividends in the last few years.
Zinc outlook is a function of international demand and supply factors. According to International Lead-Zinc Study Group, the growth in global demand for refined zinc metal - which accounts for more than 60 per cent of revenue for Hindustan zinc(in FY21) - is forecast to rise by 4.3 per cent to 13.78 million tonnes this year. This is expected to be higher than production growth (3.1 per cent to 14.13 million tonnes) in 2021, resulting in contraction in surplus to 353 kilo tonne (kt) as against 501kt in 2020.
On the other hand, as per news reports, China will continue to release more of its copper, aluminium and zinc reserves into the market to guide prices to a reasonable range, since the current prices are considered to be high. Considering these factors, while the upside is capped, fundamentals will lend some support to the metal prices going ahead.
Domestically too, the demand prospects for the metal look decent with higher demand anticipation for steel. Significant portion of the zinc production is used for the purpose of galvanisation of steel. Recent asset monetisation scheme by the government that aims at tapping private sector investment for new infrastructure creation and other measures is expected to give good push to the capital investments in the country.
In case of lead that accounted for 15 per cent of revenue in FY21, the sector is already showing signs of recovery and demand from the replacement auto batteries is expected to rise as distribution networks for auto sector fully open up.
To capitalise on the increased demand for the metal, Hindustan Zinc is well positioned with its expansion plans from 1.2 million tonnes per annum (mtpa) to 1.35 mtpa in the next few years. Also, the company plans to move high margin silver (20 per cent of the company’s revenue in FY21) productionfrom 700 tonnes now to 800- 900 tonnes level.
When the Covid-19 struck in 2020, Hindustan Zinc mines were operated at minimal utilisation rates. Once the production picked up, the company tried to strike a balance between domestic and international (sometimes, more than 50 per cent) sales as demand from domestic market remained muted.
Improving its performance since then, aided by favourable metal prices, HZL had its best earnings in Q4 FY21 with highest-ever EBITDA of ₹3,875 crore and 57.6 per cent margin. Thus, despite the impact from the pandemic in the initial leg of the fiscal, the revenue and net profit of the company in FY21 went up by 21 per cent and 17 per cent y-o-y to ₹21,932 crore and ₹7,457 crore respectively.
The operational performance in the first quarter of FY22 was slightly weaker sequentially mainly due to second wave of COVID-19. It was also impacted by higher Zinc cost of production (COP) before royalty, which was at $1,070 per tonne, up 5 per cent y-on-y and up 13 per cent sequentially in USD terms. The upward pressure on COP primarily stemmed from increase in prices of input commodities such as coal and diesel.
The company maintained zinc production guidance for the FY2022, in the range of 1,025 to 1,050 kilo tonnes (10 per cent up from FY21 levels) and saleable silver production at 720 kilo tonnes (from 706 kilo tonnes in FY21) . The company also expects zinc COP before royalty in FY22 to remain below US$1000/tonne, a positive for margins. It is also working towards increasing the share of value-added products from current 20 per cent to 25 per cent. The company has a strong balance sheet with net cash of ₹15,100 crore as on March 2021, which can support its capex plans.
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