Hindustan Zinc- 8% increase in Net revenue with a positive future outlook

Hindustan Zinc Limited is the only company in India that specializes an integrated production of lead and zinc. The company produces Zinc, lead, silver and cadmium. It is the world’s second largest producer of zinc.

In the second quarter of FY22 the mined metal production went up by 12% QoQ and 4% YoY. The production of refined zinc declined by 14% QoQ and 10% YoY while the production of lead also declined by 18% YoY. The silver production was in line with the lead production and was down 5% YoY. The FY22 Q4 target for silver production stands at 720 tonnes.

The cost of production of all the products increased drastically because of a staggering increase in the price of coal, met coke and diesel. Also due to the shutdown of maintenance the volume being produced by the company was dwindling. In retaliation to this, management has increased the ore reserves from 115MT to 150MT and even the cost guidance saw an upwards push in FY22. The cumulative capital expenditure for FY22 has been set at $250-300 million.

The Net revenue increased by 8% YoY to Rs.61.2 billion mainly due to the increase in net realizations which were sought after because of the decreased volume produced. Even though the EBITDA increased YoY by 13%, the quarterly growth was at a decline by 6% which can be attributed to very high input and operational cost and less volumes produced. The Profit after tax stood at Rs.20.2 billion which is 4% higher than last year but 4.7% lower than last quarter. The PAT margin declined by 132.9bps YoY from the second quarter of FY21. The Return on Equity has been estimated to increase from 22% in FY21 to 31.7% in FY22. A 33.4% increase in the EPS has been reported as possible by the analysts for FY22 as compared to the 17.3% increase that took place in FY21. The P/E value which stood at 16.9 in FY21 is estimated to decline to 12.6 in FY22 which may show that the company is undervalued.

Given the current scarcity of metals and coal, and the huge hike in raw material prices, the company is slowly adjusting to the new normal and building a new supply and operating chain around it. Given its strong valuations and a lower than CMP intrinsic value, buying the share at the correct time will mostly yield good profits to the investor.