Hi was studying Hindustan Zinc as a dividend play. Enclosing a ppt of the same. The key findings are summarised below:
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HZL is one of the largest zinc-lead producers globally and largest in India. 10th largest silver producer globally. It enjoys strong free cash flows, is debt free, strong profitability and high ROEs. It is also amongst the lowest cost producers and has transitioned to underground mining from open cast mining.
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Historically a PSU, but acquired in FY03 by the Vedanta group who subsequently expanded zinc capacity from 0.2 mtpa to 1 mtpa currently. Promoter holding is ~65%
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It operates in a commodity business. Commodities are cyclical and dependent on demand-supply. Zinc (~75% of PBIT profits in FY19) is turning into surplus from 2022 (deficit in 2016). International zinc LME prices (USD per tonne) have softened by 35% to ~ USD 2,343 currently from the peak prices of USD 3606 in Jan 2018
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Share returns since Jan 2011 have been impressive with aggregate returns of 550%; however, returns have been cyclical. Currently share price has fallen to Rs 215 per share from ~ Rs 325 in March 2018.
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At current valuations, the stock is trading at mid-point of historical P/BV levels and higher range of EV/EBITDA valuations. Given that zinc prices are likely to remain volatile with a downward bias, further share price correction is possible.
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HZL dividends have sharply risen since FY16 when its cash & cash equivalents were Rs 352.7 bn. Cash balances as on March 2019 are Rs 169.5 bn. Recent dividend payout in FY19 was Rs 20 per share or ~ 9% dividend yield.
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Rationale for dividend payout in the past includes paying off debt to group parent companies (Vedanta Resources and Volcan Investments). This may continue in the future and provide dividend income to investors in the interim, but could come at a risk of initial investment in the medium term.
Disclosure: Not investedHindustan Zinc 14.9.pptx (1.8 MB)