The above title refers to Hindustan Zinc Ltd (HZL) in the context of Sesa Sterlite and Vedanta`s portfolio and in the context of Zinc as a commodity.
BUCKING THE TREND
While the commodity slowdown has been much discussed by this website, further research has shown that Zinc may be one of those commodities that may just buck the trend. While the China slowdown is imminent, and considering that China consumes more than 45% of global Zinc production, the chances of a Zinc bull run are slim. Nonetheless, issues relating to Zinc mine closures and labor strikes are significant and are expected to keep Zinc prices stable.
http://www.bnamericas.com/news/metals/teck-sees-zinc-rising-on-mine-closures1
http://online.wsj.com/articles/zinc-prices-surge-as-supplies-shrink-1403474976
To quote HZL`s 2013-14 Annual Report
” Century mine, Australia with 500,000 MT to close down in 2015. 160,000 MT Scorpion mine in Namibia closing in 2016 and 70,000 MT Poland mine closing in 2017 with 2.2 Million MT global capacity to be eliminated by 2019 “
Global consumption of Zinc currently stands at about 13 Million MT. 2.2 Million MT of eliminated capacity means a lot. Remember, Zinc is not shale oil or gas, which can be tapped ubiquitously by drilling a hole in the ground. Developing a greenfield mine is harder and takes more time. And this brings us to our protagonist.
HZL`S RESERVES AND PRODUCTION
HZL’s operations include five zinc lead mines, four zinc smelters, one lead smelter, one lead zinc smelter, seven sulphuric acid plants, a silver refinery plant and five captive power plants in the state of Rajasthan. In addition, HZL also has a rock-phosphate mine in Maton near Udaipur in Rajasthan and zinc, lead & silver processing and refining facilities in the state of Uttarakhand. The Company also has wind power plants in the State of Rajasthan, Gujarat, Karnataka, Tamilnadu and Maharashtra. (Source: Annual Report 2013-14)
HZL is the 2nd largest Zinc miner globally, 4th largest Zinc Lead metal producer globally, among the lowest cost producers of Zinc and has 1 Million+ MT integrated metal production capacity.
Click to access IMYB%202011_Lead%20&%20Zinc.pdf
At 880,000 tons of metal production (Lead + Zinc) per year and reserves of 35 Million MT of metal, HZL`s mines can run for more than 30 years at least.
The company`s Rampura-Agucha mine is the world`s biggest mine and has one of India`s highest metal content at 15.5%. HZL has smelter capacity (to convert ore to metal) of 1 Million MT and the company`s Chanderiya Lead Zinc smelter with a capacity of 610,000 tons is the world`s largest.
COST OF PRODUCTION
HZL`s cost of production with royalty is $ 1000/MT and $ 840/MT without royalty. With Zinc trading at $ 2200/MT, the company makes a margin of over $ 1000 per MT of Zinc sold.
FINANCIALS
For 2013-14, the company generated Rs 13,700 Crs of revenues (10,700 from Zinc, 2000 from Lead, 1600 from Silver, 180 from Wind minus the excise duty), Rs 8800 Crs of EBIDTA and Rs 7000 Crs of PAT. For a capital employed of Rs 12,000 Crs, the company easily hits RoCE`s above 50%. The company paid out a dividend of Rs 3.75/share for a Face Value of Rs 2/share.
MAT CREDIT
The company`s tax expense for 2013-14 was reduced by Rs 1000 Crs, thanks to MAT credit.
While I understand MAT and the credit (since companies may sometimes be liable for higher tax under MAT, due to book profits including reserves also), I would like readers to help me understand if such large credits are sustainable over longer time periods.
EXCELLENT FREE CASH FLOWS, NO DEBT
The company is sitting on a mountain of cash (Rs 25,500 Crs) and generates more than Rs 3000 Crs of free cash (after accounting for about Rs 3700 Crs of capital expenditure and dividend). Company is debt free.
CAPEX SPEND AND 2019 PROJECTION
Company projects spending $ 250 Million on mine development expenditure every year for the next 5 years and will hit metal output of 1.2 Million MT by 2019. Rampura-Agucha, the company`s flagship mine, will be converted from the current open cast to underground mining.
INDIA AND ZINC
India is the 3rd largest producer of Zinc with 6% of global production share. India`s share in world consumption of Zinc is 4.2%.
RAJASTHAN AND ROYALTY
All of the company`s operations are in the state of Rajasthan. The Vizag smelter was shut down sometime back. The company paid a royalty of Rs 1000 Crs in 2013-14. If I am right, then this royalty would have been pocketed by the state government of Rajasthan.
Click to access Exploring_India_Mining_the_opportunities_FINAL.pdf
An excerpt from the above E&Y report
” The maximum mining lease area was covered by Rajasthan (21%), Orissa (14%) and Karnataka (12%) ”
A business friendly government in Rajasthan and in Delhi should ensure that royalty payments are reasonable.
SHAREHOLDING
65% of Hindustan Zinc is owned by Sesa Sterlite. 59% of Sesa Sterlite is owned by Vedanta Resources UK and the promoter company holds 69% in Vedanta Resources. FII`s only hold 2% stake in HZL.
For those who are not aware, HZL was a government owned enterprise until 2000 after which the same was divested to Sesa/Vedanta. Initially, 26% was divested and Call Options were awarded to allow subsequent stake sales. While the other options have been exercised by Sesa, which is the reason why Sesa Sterlite has a 65% stake in HZL, the final Call Option is under litigation.
As per the above article, Sesa Sterlite is valuing HZL at $ 11 Bn (25% above initial offer price of $ 2.6 Bn for government`s 30% stake). From how I see it, Sesa is looking to make HZL a wholly owned subsidiary (by buying government stake, their shareholding goes up to 95%). With a current market cap of Rs 69,000 Crs or $ 11.5 Bn, Vedanta`s offer price to the government is just a tad higher than the market price.
Will the government accept Sesa Sterlite`s offer? I really doubt it. Indian markets are booming and HZL is trading at a puny P/E of 10 times. The government will be able to fetch a substantially higher price in the open market. Also, with the government running a deficit budget, there is no reason for them to sell HZL at current valuations to Vedanta.
DIVESTMENT SCAM
An investigation behind the initial divestment of HZL (in 2000) is ongoing. The charge is that the then government sold the 26% stake in HZL for an undervalued sum. How much of an effect will this have on the stock price? Tata Sponge was entangled in the coal scam during the time of this website`s recommendation. It went up by 4x.
COMPARISON WITH THE PARENT
Sesa Sterlite with a debt of Rs 35,000 Crs, market cap of Rs 68,000 Crs trades at a standalone P/E greater than 50x and a consolidated P/E of 7x. More importantly, it has a 17% FII holding. Sesa Sterlite`s business (which includes iron ore, copper, oil and gas) looks a lot less attractive than HZL. I believe that the only reason for low FII holding in HZL is the 5% free float (65% held by promoter and 30% by GOI).
VALUATION RATIONALE AND BUY RECOMMENDATION
The company makes more than $ 1000 per MT of Zinc sold. Zinc prices may correct, but I doubt if a bear rally will take hold of Zinc. Add to this the fact that the company is sitting on great reserves, tons of cash and no debt. Subtract the cash and we get a market cap of Rs 45,000 Crs for a company that makes a PAT of Rs 7000 Crs and margins above 50%.HZL is a great large cap value pick.
DISCLOSURE: I hold stake at current levels
thepokaranmoneymanager 
should i exit fedder llyod and enter niit… ?? or stick to fedder
I will never recommend exiting fedders. You can be in both
Should fall in copper prices have a positive impact on Transformers and Rectifiers ??
Definitely
Why is the stock underperforming ..
It showed good strength last week and was hoping it to continue ..
I have no idea
What do you think if govt comes up with OFS it might be at lower than market price. Isn’t it? This is the only reason i am partially invested in it
sir,do u always visit or get in touch with the management of the company before investing in any share?if not then how do u come to know that the people running the business are good or not?
Hi Roshan. Am not sure if I am allowed to post/speak about these due to new SEBI regulations. Sorry for that.
i think the sebi regulations are for recommendations…i just asked u about something in general about investing..
As you read countless annual reports, you will start realizing that something is amiss with some companies. And that is where your judgement and temperament play a role. Finally, stock picking is like doing a forensic investigation.
thanks 🙂
Got this forward from a friend ..
As most of the holding companies are in focus .. Bombay Burmah , Bengal and Assam ,
How about Ramco Industries ??
u guys have no idea the potential ramco ind has, it has stakes in ramco cements which was madras cements so why the sudden name change, plus stake in ramco systems which has given more than 800 percent return and rajapalayam mills, current value of stocks is over 1600cr with a current pat of hardly 50-70cr. patience is all that is required. keep buying and you will never regret as the downside is limited.
Hindustan Zinc has been this strong since atleast six years, but stock price didn’t reflect that strength. Plausible reason might be dependency commodity price.. most of the commodity stocks command lower valuation. But your blog effectively articulates strength of this giant.
On different tangent, request your view on Simmonds Marshall please.
Hi Arun,
I have no plans of registering (with SEBI). Either will stop posting publicly or share privately with likeminded friends (like you) to find great values. Always willing to collaborate / co-operate! Thank you.
Thank you Raju
Please take a look at JBMA charts. Is it a hold/average/or book loses. My average buy price is Rs 240. The stock is now at 177/- I hold 4000 quantity. Or should i sell part of the stock and move it into SKM which is consolidating (I already hold 5000 of SKM@100)? Are we anywhere near the bottom. The most worrisome part is that there is no apparent explanation for this kind of a free fall. Please please advise.
Sorry. But new sebi regulations do not allow me to give any such advice
can you then drop me a mail on it? hellonandini@gmail.com Please just this once? Will not bother you again for mails.
hello sir
bengal and assam blasted to 640 from 500….what’s your view on Williamson Magor…total holding in eveready and mcleod Russel plus land bank comes to nearly 1000 crores and it’s mcap is only 78 crores…do you think it’s undervalued…thanks
Sir pls I want your mail id !
If it is for recommendations, am sorry. SEBI regulations dont allow me to do anything of that sort
Sir, the biggest concern with this company is major shareholder.. vedanta group. They don’t enjoy the perception of an ethical and honest management. share prices may not be moving due to this…
Then why does Sesa Sterlite trade at such rich valuations?
Sir, honestly speaking, i don’t know why sesa is commanding such a rich valuation… but look at cairn energy…. a growing and profit making oil company is available at a huge discount to its PSU peers, which doesn’t happen normally. I must accept that i am not a market expert and there is every possibility that i may be wrong…..
Regards.
Sir can you please update on SKM, Premier Explosives and V2 retail to be bought @ CMP or wait for correction.
Sir your view on CMP of SKM, Premier EXPLOSIVES AND V2 RETAIL. I want to buy them.
Sorry. New SEBI regulations do not allow me to comment
sir ur take on Hexaware technologies
Sorry. New SEBI regulations do not allow me to comment
Now the SEBI regulations give you time till 29th March 2015 to comply with the norms. Which means you can freely comment till then. In which case will you give your view on GS Auto International?
Can you show any links for that? I know that it says 6 months from time of gazette publication (Sep 19) in the regulation. But below newspaper article talks about some Indore RA being penalized
http://www.deccanchronicle.com/141208/business-latest/article/sebi%E2%80%99s-rules-makes-analysts-wary
No specific link. Just that other blogs (valuepick is one example) have said so and have resumed posting.
Sir pls comment on godavari drugs ! can post my in email !
Sir, theBiggest concern would be the free float of 5% in HZL, if Sesa sterlite lays hands on the 29.5% govt stake, it will most probably lead to de listing of this scrip, the last offer approved for HZL by board of directors of vedanta has been 174 per share, which means currently the upside would be restricted,m would appreciate your views on the same.
Sir post next stock like skm egg products !
Sir, do you think SKM egg has pricing power to pass raw material cost easily?
What would be the impact of MD of HCL Infosys resigning and CFO of Maharashtra Seamless Resiging ..
The stocks are already down 30-40% from their recent peaks ..
Lots of instutions hold both the stocks ..
Do you also believe one should invest in stocks which have less institution holdings ??
Does that make an opportunity to buy when there is pain in the stock ..
Please Reply to my query sir 🙂
Regards
best review
Is SEBI regulation came into force? When u will be posting new recommendation?
That is why I have stopped posting
Hello Sir, Why no postings nowadays??
Due to SEBI`s new research analyst regulation
whats your views on V2 retail sir????
Hi, I guess SEBI has given an extension of 6 months for people like you to register with SEBI and meanwhile, recommendations are legal.
sir, all other analysts are recommending. Please reconsider till the law is enforced. Your analysis is thorough. We have been learning lots from your analysis.
Thanks
Joey
Sir,
The other blogers are continuing recommendations on their blogs, as SEBI has given 6 months time upto May 2015 for registration, till then all recommendations are legal.
Please sir, continue your recommendations on this blog till the law is enforced.
Thanks
Venkat
Sir,
The other blogers are continuing recommendations on their blogs, as SEBI has given 6 months time upto May 2015 for registration, till then all recommendations are legal.
Please sir, continue your recommendations on this blog till the law is enforced.
Thanks
Venkat
Copper tumbled the most in almost six years.The lower copper prices will benefit the OEM maker lloyd electric. which uses copper as main raw material.Copper prices are at the lowest point since 2009. this will lead to lower expenses and higher net profit. A save of 10 to 15% savinfg on raw material price will benefit to the extent of 50 Crores on net profit in the coming two qurters on sales of 1200 Crores and expense of 950 cr expenses.
50 cr saving is equivalent to Rs 15 EPS. it could be even higher if the sales are more.
Would like to know your view. do u still see lloyd moving to higher leves as a consumer product manufacturer and this industry will grow at a higher CAGR.
can Lloyd electric can be bought with a longer tem view.
kindly provide your comment
As per new SEBI regulation.. to recommend in a public forum one doesn’t need to be a research analyst & does not require to register. Have been hearing in all the places. Kindly refer on it.
Sarav
I have no idea about this. But I have stopped just to be on the safe side. Maybe if something concrete comes out, I may rethink. Currently, I use a bit of sumzero
Sir
Please mail me your mail id at rajdasgupta@rediffmail.com
I was a big time follower for you recommendation , but since you stopped communicating here – it would be really great if it can be done through mail 🙂
Thanks
Raj
Hi my first comment & it ll b helpful for u fellow followers here is the link of sebi extension for recmendations value-picks.blogspot.in/2014/12/please-note.html?m=1
Sir, I was follower of your recommendations on this blog. I am eagerly waiting for resume of your recommendations on this blog. If any reasons, it could not be possible, I will be great if any new stock idea for recommendation be shared with my eMail ID (reddycv24@gmail.com). I will be very thankful.
With regards,
Venkat