Bright Prospects for HZL with Zinc International Deal, But Valuation Weighs

  • 23-Jan-2023
  • Journalist: Jaideep

New Delhi: The quarter ending December 31st saw Hindustan Zinc Ltd (HZL) take a hit due to reduced Zinc prices and cost pressures. The most notable news, however, was the acquisition of Zinc International assets by HZL's parent company, Vedanta Ltd. Analysts praise the move as a beneficial step towards bettering HZL's growth prospects, yet they remain skeptical on the deal's pricing.

Zinc International holds mining assets in South Africa and Namibia, boasting 35 million tonnes in reserves and resources. To acquire these assets, Hindustan Zinc will pay a maximum of $2.98 billion in cash. Analysts believe that this acquisition is beneficial for HZL as it gives them access to many Zinc mines that are not often put up for auction in India, allowing the company to grow with less hindrance from current mining assets.

The acquisition would dramatically increase capacity from 1.2 million tonnes to 2 million tonnes, and give access to business opportunities in Africa, Europe, and North America. The deal is expected to be closed within 18 months; however, many analysts are concerned about the valuations attached to it.

Expansion of Zinc International is deemed a difficult undertaking due to the terrain of its mines and the risks associated with its implementation. The acquisition, priced at $3 billion, is said to carry potential for significant growth; however, many analysts believe that this valuation is higher than the company's fair value at $2 billion.

The acquisition is expected to add vast value over the long-term; however, its expensive evaluation may decrease near-term stock performance. The acquisition implies an enterprise value to Ebitda ratio of 11x, with a 70% stake in Gamsberg (mines in Namibia) factored in, the ratio rises to 12-13x.

At the estimated FY24, the purchase consideration implies a very expensive valuation of 14x EV/ Ebitda - much higher than the average 7x FY24 EV/ Ebitda observed in global peers.

The company's Q3 results showed that revenue from operations was ?7,866 crore, a decrease of 1.6% year-over-year and 5.6% on a sequential basis.

The earnings before interest tax depreciation and amortization (Ebitda) ?3,717 crore fell sharply by 15.4% year-over-year (y-o-y) and 15.3% sequentially. This was attributed to decreased revenues coupled with increasing costs caused by the ongoing input commodity inflationary environment. The Zinc cost of production before royalty (COP) for the quarter was $1,293 (?1,06,203) per tonne, representing an increase of 12.7% y-o-y (23.5% in rupee terms) and 2.7% sequentially (5.9% higher in rupee terms). The net profit for the quarter was at ?2,156 crore, down 20.2% y-o-y and 19.6% sequentially.

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