Zinc Int’l deal brightens HZL’s growth prospects but valuation weighs


NEW DELHI : Hindustan Zinc Ltd’s (HZL) performance for the quarter ending 31 December was impacted by lower zinc prices and cost pressures. The street’s focus, however, has been on the company’s announcement on acquisition of Zinc International assets from parent Vedanta Ltd. Though analysts feel the acquisition will help improve the company’s growth prospects, they have raised concerns on the valuation of the deal.

The stock closed 6.32% lower on the National Stock Exchange on Friday.

Zinc International has mining assets in South Africa and Namibia with a total reserves and resources of about 35 million tonne which Hindustan Zinc will be acquiring for cash consideration of not more than $2.98 billion. The analysts feel that the acquisition provides HZL the opportunity to increase its mining asset portfolio as not many zinc mines are available for auction in India and there is limited upside potential for production from current mining assets.

The acquisition will also ramp up capacity from 1.2 MT to 2 MT plus, while giving access to countries in Africa, Europe, and North America, said analysts at Motilal Oswal Financial Services Ltd. The acquisition is likely to be completed in 18 months. However, it’s the valuation of the deal that is looked at with concern by many analysts.

“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,” said analysts at Kotak Institutional Equities. Expansion at Zinc International would be a challenging task, given the undeveloped mines and faces significant execution risk, they said. The acquisition at $3 billion has a significant value ascribed to growth optionality. They find the acquisition expensive versus their fair value of Zinc International at $2 billion.

Even analysts at JM Financial Institutional Securities Ltd also have similar views and said that 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. The acquisition is implying valuations of 11x EV/ Ebitda (enterprise value to Ebitda) and adjusting for 70% stake in Gamsberg (mines in Namibia), valuation could be 12-13x EV/ Ebitda,they said.

Analysts at another domestic broking said that at FY24 estimates, the consideration implies valuation of 14x EV/ Ebitda (global peers trade at average 7x FY24 EV/ Ebitda), which is very expensive

Meanwhile, the company’s Q3 performance saw revenue from operations during the quarter at 7,866 crore, down 1.6% y-o-y and 5.6% sequentially.

The earnings before interest tax depreciation and amortization (Ebitda) 3,717 crore declined sharper 15.4% y-o-y and 15.3% sequentially. This, as per the company, was primarily due to lower revenues and increased costs on account of the prevailing input commodity inflationary environment. Zinc cost of production before royalty (COP) for the quarter came at $1,293 ( 1,06,203) per tonne, up 12.7% (23.5% higher in rupee terms) y-o-y and 2.7% (5.9% higher in rupee terms) sequentially. Net profit for the quarter was at 2,156 crore, down 20.2% y-o-y and 19.6% sequentially.

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