High other income, silver sales boost earnings
* Robust silver sales, higher other income and resultant low effective tax rate of 18% during the quarter led to better-than-expected results. We note that the guidance of 950kt mined metal for FY21 is lower than the Q4FY20 run rate, which looks quite conservative.
* Management highlighted that its cost of production (CoP) adjusted for donations to PM Cares fund and start-up cost post Covid-19-related shutdown was $954/t. However, the annual guidance for FY21 CoP stood at below $1000/t, which we feel is also conservative.
* Management did not elaborate on media reports regarding a potential bond issue. We believe that the bond issue could be used for capex, while cash in hand of Rs15.5bn could be used to distribute dividends to holdco Vedanta Ltd, given high leverage at Vedanta Plc.
* We note that Zn/Pb prices have rallied 21%/15% from their March lows aided by a recovery in China. We raise our FY21/22 Zn/Pb LME estimates by 7%/6% and13%/12%. Maintain Hold with a revised TP of Rs208 (vs. Rs187), valuing at 6x FY22E EV/EBITDA estimates
Results operationally in line: In terms of production, Zinc - 157kt (yoy/qoq: -9%/-9%) vs. our estimate of 160kt, Lead - 44kt (yoy/qoq: -7%/-10%) vs. our estimate of 42kt and silver - 117t (yoy/qoq: -26%/-30%) vs. our estimate of 120t were all in line with our estimates Silver sales at 146t was high due to inventory liquidated by HZL. We note that silver EBIT was marginally higher than the Zn/Pb EBIT for the first time, which redefines how silver could be looked at as a separate business entity in future.
Other Income driven by MTM gains: HZL reported highest other income in the past 14 quarters driven by MTM gains on treasury investments. The ETR on the treasury income is lower than the ETR on the operational income due to the inclusion of tax free bonds and investments in bond funds, which resulted in a lower effective corporate Income tax rate of 18% during the quarter, driving up the PAT.
Outlook and valuation: Management has guided for 925-950kt mined metal and 650t of silver production in FY21. Management remains apprehensive about the second wave of Covid-19 and hence, is guiding for a lower production target compared to its Q4FY20 run rate. This is despite most of its 1.2mt related capex expected to complete by Q2FY21. With the zinc and lead prices rallying by 21% and 15% from their March lows, we believe that the trough lies behind. However, the lack of better guidance on volumes and CoP has resulted in retaining Hold rating on the stock with a slight OW in sector EAP. Key risk: Lower-thanexpected metal prices.
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