Hindustan Zinc: Long-term investors should stay put

Even as the govt plans to divest stake, the downside is limited

Although it is not known how the government would offload its 29.54 per cent stake in Hindustan Zinc Limited (HZL), analysts believe the downside for the stock is limited, adding investors should hold on as the company's prospects remain stable.

In the near term, however, there appears less steam left in the stock, given the recent spurt, led by news of divestment by the government. Around early May, the market started assuming the stake sale would happen at a premium to the then prevailing price. As a result, the stock has moved up from Rs 120 levels to Rs 165 currently.

  The previous time Vedanta had offered to buy the government's stake, it was willing to pay Rs 149 a share, valuing the company at about four times its estimated enterprise value to operating profits for FY14. This time as well, the Street believes valuations could be on the higher side, given the larger cash and investments worth Rs 25,500 crore in HZL's books. Vedanta's board has empowered itself to make an offer of up to Rs 21,637 crore for the government's stake, translating to about Rs 174 per share, which is 17 per cent higher compared to its earlier offer and 5.5 per cent more than the current price.

In this context, there is not much leeway for the stock to go down or up in the near term, unless the outlook for metals changes or Vedanta raises the price.

"We believe the company's strong fundamentals deserve a better valuation. However, technically due to Vedanta's last offer of Rs 149 per share, the stock is not likely to move beyond that, unless the buyout offer gets revised upward," says Goutam Chakraborty of Emkay Global. This is also looked in light of the outlook, as over the next two years analysts are expecting HZL's earnings to grow annually by about three per cent due to marginal gains in volumes and realisations.

But, beyond the stake sale plans, analysts believe that investors should focus on the longer-term prospects. "We continue to like HZL, given its presence in the lower end of the global cost curve facilitated by high grade captive mines sufficient to meet requirements for decades, 100 per cent captive power plants, sizeable scale of one million tonne plus, a diversified revenue stream, with increasing contribution from silver sales and a strong balance sheet with FY14 net cash of Rs 60 per share," said Ashutosh Somani of JM Financial. Besides, HZL is debt-free, generating operating cash of Rs 7,000 crore annually and earning high return on equity of 23.4 per cent.