Hindustan Zinc shares: Capex plans could dim appeal of dividend payouts

Shares of Hindustan Zinc Ltd plunged more than 7% to ₹342 apiece on the BSE in Friday's early deals after the Vedanta Group company's net profit for the third quarter ended December 2022 fell 20% to ₹2,156 crore as compared to ₹2,701 crore in the same quarter of the previous fiscal.

“Smelters shutdown in Europe and reopening in China are expected to support zinc prices in near term. However; demand outlook is still clouded as Europe and US are not out of trouble yet. 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.

Anil Agarwal-promoted Vedanta said it will sell Zinc International assets to Hindustan Zinc for a cash consideration of $2,981 million. The acquisition will help ramp up from 1.2mt capacity to 2mt+ capacity, while giving access to countries in Africa, Europe, and North America. Hindustan Zinc will also start to pay 2% royalty on sales to Vedanta Ltd for Brand name usage, as per analysts.

They believe that if the deal goes through, Hindustan Zinc's ability to provide dividend will be severely compromised as ZI will entail additional capex. Considering the same, PhillipCapital is downgrading rating on Hindustan Zinc shares to ‘Sell’ whereas maintaining its target price at ₹315.

The management reiterated its volume guidance for FY23E of over 1mt and a gradual ramp up to 1.2mt volume by FY24. Those at Motilal Oswal believe Lower Zinc and Lead stock at warehouses should provide price support.

“We have raised our FY24 estimates to incorporate the cost reduction benefits. At its current levels, HZ is trading at a rich valuation of 6.7x FY24 EV/EBITDA. We reiterate our neutral rating on the stock for a target price of ₹350,” the brokerage suggested. 

The acquisition will offer growth optionality given the potential to develop capacity of ~1 mn ton over the next around 6-7 years thereby doubling HZL’s overall capacity, as per JM Financial which is bullish on the stock with a target price of ₹350. “While the acquisition (if it goes through) will add significant value over the longer term, the expensive valuation is likely to weigh on near term stock performance,” it added. 

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.