Vedanta Group company, Hindustan Zinc’s shares opened 8.62% lower on Friday and fell as much as 9.89% to reach an intraday low of ₹ 340.20 apiece. This happened after the company announced the acquisition of Vedanta’s Zinc International (ZI) assets for a cash consideration of $ 2,981 million.
Hindustan Zinc is a subsidiary of Vedanta, making this transaction a related party transaction. Vedanta Limited currently holds a 64.92% stake in Hindustan Zinc. The proposed transaction is subject to the receipt of necessary regulatory approvals.
On receiving timely approvals, the transaction is likely to be completed in a phased manner over a period of 18 months. This will ensure that Vedanta receives the full value of assets over time. In addition, it will provide Hindustan Zinc with the necessary flexibility to fund the acquisition. It will help Vedanta to simplify its portfolio and focus on core operations.
Vedanta’s board approved the sale of Zinc International’s assets held by THL Zinc Ventures Ltd (Mauritius) (THL ZV). The assets held THL ZV through THL Zinc Ltd (Mauritius) comprising shares held in Black Mountain Mining Pty Ltd, South Africa (69.6 percent) and THL Zinc Namibia Holdings (Pty) Ltd (100 percent), Namibia, will be sold to the proposed wholly-owned subsidiary of Hindustan Zinc Ltd (HZL).
Hindustan Zinc believes that these assets will earn significantly higher returns compared to current treasure returns and will also improve overall synergies between the businesses. It hopes to not only achieve market share gains, but also geographical diversification.
“The assets have significant growth potential, given rich resources; however, we find the acquisition expensive on current earnings, as growth optionality has high execution risk. We cut our FV to ₹ 270 from ₹ 285) and downgrade the stock to sell from reduce,” said Kotak Institutional Equities. This indicates a downside of 23%
Market observers say that the deal is negative for Hindustan Zinc as it is a related party transaction, done on an expensive valuation. Hindustan Zinc’s gross cash levels stood at ₹ 16,482 crore, while net investments stood at ₹ 11,378 crore at the end of last year. This acquisition will drain the company of most of its cash.
Philip Capital downgraded its rating on Hindustan Zinc to ‘Sell’, but maintained its target price at ₹ 315.
“Acquisition of ZI seems expensive (c.7x assuming 500Kt sales) despite growth potential which may take time to materialise. Also, ZI lacks matching smelting capacity at present and thereby working at lower margins,” said analysts at PhillipCapital.
They believe that if the deal is approved, Hindustan Zinc’s ability to provide dividends will be severely compromised, as ZI will entail additional capital expenditure.
Hindustan Zinc is known for paying dividends to its shareholders. It has a high dividend yield of 9.67%. The company paid an interim dividend of ₹ 21 per share (1050% of its face value of ₹ 2) in July 2022 and a second interim dividend of ₹ 15.5 per share (775% of its face value of ₹ 2) in November 2022. Thus the company has already paid ₹ 36.5 in dividends this year.
According to a regulatory filing, the company has approved a third interim dividend of ₹ 13 per equity share (650% of the face value of ₹ 2).
It is a large-cap company with a market capitalization of ₹ 1,59,527 crores. It has a good return on equity of 28.79% and an ideal debt-to-equity ratio of 0.07. Its shares were trading at a price-to-earnings ratio (P/E) of 14.01, which is slightly higher than the industry P/E of 11.70.
Written by Simran Bafna
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