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The attorney-general’s clearance for the Centre’s proposal to divest its residual stake in Hindustan Zinc Ltd (HZL) lifted the Street’s mood. As the government holds 29.5 per cent (minority) stake in HZL, the attorney-general said HZL was no longer a public sector company. With the majority 64.92 per cent stake with Vedanta, the group will be eyeing the government’s stake as well as the remaining 5.58 per cent owned by others. Thus, while HZL closed at Rs 131, up 0.6 per cent, Sesa Sterlite, too, gained 2.4 per cent to close at Rs 197. However, analysts say, while the government is more likely to go in for an auction of its holdings (which could fetch it a premium), the company’s prospects are promising. Given their targets, Rs 145-168, by reports in January, there is a potential upside of 11-28 per cent.
Bhavesh Chauhan at Angel Broking says it is still early to assume the stake sale will take place as the matter has been lingering for long and till all the compliance issues and other hurdles are sorted, the sale will not take place. However, Chauhan remains positive on the prospects and believes the downside from Rs 130 is limited. He adds the zinc prices at $2,000 a tonne are unlikely to fall much as lower prices are leading to closure of capacities and supplies are getting reduced, boosting prices. The other issue analysts are awaiting clarity on is whether the government will demand a hefty dividend payout before divesting its stake, given HZL had cash and investment of Rs 22,000 crore at end of March (Rs 50 a share). This would have a bearing on the sale price.(PROFIT GROWTH IN FY15)
Another reason to wait and watch, say analysts, is since the government is looking at auction, how much will Vedanta be able to garner and what price it is willing to pay is not known. In the past it has said it wanted majority control. Some analysts also don’t see the logic of an e-auction when Vedanta had earlier offered Rs 149 a share (13.7 per cent more than the current price). If this is any benchmark, investors stand to gain.
Strong outlook
By Emkay Global’s fortnightly metals and mining report, all base metals (except zinc) declined zero-three per cent on the London Metal Exchange (LME) during the first fortnight of January. Zinc remained flat at $2,097 a tonne. Gautam Chakraborty, analyst at Emkay says with a million tonne of mining capacity closing in a year, prices are bound to go up. In the December quarter, the average LME prices at $1,894 have increased two per cent compared to $1,859 in the September quarter. For Indian companies, currency depreciation has also supported realisations.
Meanwhile, in the December quarter, HZL is likely to report a production of 196,000 tonnes of refined zinc compared to 168,000 tonnes a year ago. Lead and silver are likely to come at 24,000 tonnes and 77,000 tonnes in the December quarter compared to 20,000 tonnes and 62,000 tonnes a year ago, by Motilal Oswal Securities. As a result, HZL is expected to post an eight-nine per cent year-on-year growth in sales and profit.
For FY14, analysts at Motilal Oswal estimate 892,000 tonnes of metal production and 343 tonnes of integrated silver production. Though HZL has guided for mine production (MIC basis) of 950,000 tonnes in FY14, in the near term, growth in production from Zawar and Kayar (new mines) and a further ramp-up at its SK mines are crucial to driving the overall production, say analysts. In six years, HZL plans to raise mined metal capacity to 1.2 million tonnes a year (from a million).
In terms of profitability, the zinc, lead and silver producing company’s cost of production is among the lowest in the world due to fully-integrated operations. The increasing silver production (bi-product of lead production) bodes well, as earnings before interest, taxes, depreciation and amortisation (Ebitda) margins for silver produced are 95 per cent. Analysts expect Ebitda to grow at five per cent compound annual growth rate in FY13-15 on higher overall sales volumes.
