IGI Logo

Lackluster quarter; power and input costs rising

Management revises costs guidance up by USD100/t

* Hindustan Zinc’s (HZ) revenue at INR83b (up 36% YoY and down 11% QoQ) in 2QFY23 was marginally ahead of our estimate of INR 78b. The revenue was higher YoY, driven by 48% higher zinc sales, which was primarily due to 9% higher Zinc prices, 15% higher volumes, and 150% higher premium. The premium was on account of unwinding of hedges, which the company had created at the start of the Russia-Ukraine conflict.

* EBITDA stood in line at INR44b (up 32% YoY and down 14% QoQ). Power and fuel costs were at INR10b, further up 11% QoQ after a 15% QoQ increase in 1QFY23, driven by higher coal prices as FSA materialization improved slightly to 14% in 2Q v/s 8% in 1Q.

* PAT grew 33% YoY and down 13% QoQ to INR27b, in line with our estimate of INR26b, as higher-than-estimated depreciation was offset by lower-than-estimated finance cost.

* The company has exhausted its remaining 50% of the hedges for FY23 in 2QFY23 after using the same in 1Q. The hedges contributed INR5b to the topline and EBITDA, marginally higher than our estimates.

* Refined zinc sales declined 8% QoQ to 189kt after a 4% decline in 1Q, due to continuous reduction in production, while refined lead sales rose 6% QoQ to 57kt after notching up 10% higher QoQ sales in 1Q. Accordingly, Silver sales, at 194tonnes, also rose 10% QoQ after a 9% QoQ growth in 1Q.

* 1HFY23 Revenue/EBITDA/PAT stood at INR 177b/95b/57b, which was up 40%/38%/39% YoY, driven by 22% higher Zinc prices, offset by 6.5%/14.2% decline in Lead/Silver prices YoY. Metal sales volume was also up 13% YoY with zinc volume at 395kt (up 12.5% YoY ), lead volumes at 111kt (YoY up 15.6%), and silver sales volume at 371tonnes (up YoY 19%).

Valuation and view

* Management guidance on cost of production continues to increase as thermal coal prices in both domestic and international market remain high, despite international prices cooling off a bit. Materialization of FSA coal volume has improved to about 14% from 8% in 1QFY23. However, USD100/t hike in COP for FY23 v/s guidance, given in 1QFY23, implies cost head winds.

* Management reiterated its volume guidance of a shade over 1mt in line with our estimates. 1.2mt volume growth continues to elude and the target is shifted to FY25 and beyond. Lower Zinc stock SHFE and curtailments in smelter production should provide price support.

* Strong cash balance of INR 178b and the management’s efforts to transfer about INR 100b from general reserve to retained earnings raises expectations of another strong dividend. However, a rich valuation at 5.6x FY23 EV/EBITDA compels us to reiterate our Neutral rating with an unchanged TP of INR 255, based on 5x FY23 EV/EBITDA.

Guidance on volume retained, costs guidance increased

* FY23 guidance:

- Mined metal production to be maintained at 1,050-1,075kt

- Silver production maintained at 700-725t (up from 647t in FY22)

- Project capex at USD125-150m

* Management revised its cost guidance up by USD100/t to USD1,225-1,275/t after a surprise downward revision in its cost guidance in 1QFY23. The increase in cost guidance is in line with our expectations. (refer our 1QFY23 RU)

* Project capex guidance also remains constant at USD125-150m, along with maintenance capex guidance at USD350-400m.

* The company entered into an agreement with promoter company for supply of about 200MW of hydro power under group captive scheme, which will reduce its carbon footprints. The company will invest about INR 3.5b toward its 26% equity stake in the company. The hydro power production will likely start from 1QFY26.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer