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MOSL: HINDUSTAN ZINC (Neutral)-In-line as production challenges continue

HINDUSTAN ZINC: In-line as production challenges continue

(HZ IN, Mkt Cap USD13.1b, CMP INR221, TP INR234, 6% Upside, Neutral)

 

• Realizations offset lower volumes: Hindustan Zinc's (HZL) EBITDA of INR21.2b (-15% QoQ) was in line with our estimate of INR21.1b as the impact of lower metal volumes (-1% QoQ; 5% miss) was offset by higher-than-expected zinc premiums. PBT of INR20.9b exceeded our estimate by 7% due to higher other income (INR5.9b) led by MTM gains on investments. PAT too increased 18% QoQ to INR20.8b (29% beat), driven by deferred tax credits of INR3.7b given the change in tax law.
• Production guidance cut by 5%: Geo-tech issues at SK mine continued, resulting in lower total mine production (-6% YoY). A new ore body of the mine encountered faults, necessitating a change in the mine plan and also a shift to lower-grade ore. Kayad mine too witnessed thinning out of ore body, leading to lower grades. Overall, grade slipped to 7.2% of ore mined (v/s 7.3% in 1QFY20 and 7.6% in 2QFY19). Management expects production to improve, given (a) the commissioning of paste fill plants, (b) the change in blasting techniques and (c) higher flexibility led by newer areas for mining. However, the FY20 mine production guidance has been cut to 950kt (in line with our estimate) from earlier 1mt.
• CoP likely to come down: Reported cost of production (CoP) declined USD19/t QoQ to USD1,048/t, led by the benefit of lower imported coal price and higher linkages, partly offset by higher electricity duty on captive power plants (USD12 impact). The company expects a further decline in CoP to USD1,030/t in 2HFY20, led by the volume-led benefit and lower fuel prices.