Hindustan Zinc’s share has been rising steadily since 24 August, and is up by 29%. While the improvement in its operations and the price outlook supports this increase, it poses a higher risk of disappointment too.
Hindustan Zinc Ltd is in a happy place. Zinc prices have looked up after Glencore Plc—the world’s largest commodities trading company— announced, in October, its plans to cut zinc output by a third. In any case, Hindustan Zinc’s September quarter results should cheer shareholders.
The company’s sales rose by 8.7% sequentially to Rs.3,908 crore, with mined metal output rising by 3.5%. Refined zinc output was much higher, rising by 12.8% sequentially, which Hindustan Zinc attributed to better smelter efficiency and conversion of semi-processed material. Lead and silver output too rose significantly.
But the price situation is grim. Zinc prices on the London Metal Exchange fell by 15.7% during the quarter, and premiums (received for timely delivery of the metal) have fallen too. Lead and silver prices were down as well. A weaker rupee, versus the dollar, partly helped.
Hindustan Zinc’s Q2 profit rises 5% to Rs.2,285.26 crore on improved sales
But higher output and efficiencies meant that the company’s cost of production for zinc declined by 1.4%. This quarter also saw a reversal of Rs.140 crore, as excess provision made for contribution to the District Mineral Foundation Fund was written back. Adjusting for this and one-off provisions made in the June quarter, Hindustan Zinc’s operating profit margin has declined by 3 percentage points. The reported profit after tax is up by 19%, which includes the effect of these provisions.
The company’s expansion plans remain on schedule, which should see output ramp up in the next 12 months. Higher output and steady prices are good omens for Hindustan Zinc in the current quarter. But the metals industry continues to be open to the risk of international developments, mainly in China and weak demand from developed markets. Any unforeseen event could push zinc prices down again. That’s the main risk Hindustan Zinc’s investors should watch for.
The firm’s share has been rising steadily since 24 August, and is up by 29%. While the improvement in its operations and the price outlook supports this increase, it poses a higher risk of disappointment too.