How Hindustan Zinc Aims To Unlock A $3-4 Billion Market Value Via Demerger

Hindustan Zinc Ltd. plans to demerge its company into three separate entities, as it aims to unlock a potential $3-4 billion of market capitalisation, according to Chief Executive Officer Arun Misra.

“By the next board meeting, we will hear some good news," Misra told NDTV Profit.

Misra said the ownership pattern of primary shareholders will remain unchanged after the demerger and the dividend distribution policies will stay in line as well.

Thus, with an estimated $3-4 billion value of market capitalisation being unlocked, divestment of government shares will be easier in separate zinc and silver entities, as two different sets of shareholders would like to acquire those shares.

In Q3 FY24, the company’s zinc cost of production fell to $ 1095 per ton, lower than its guidance of $1,125- 1,175 per ton, marking the fourth consecutive quarter of cost reduction. Apart from softening coal prices, Misra highlighted several key measures that aided in driving this operational efficiency.

The top executive mentioned the debottlenecking of its power plants in a manner that would now allow up to 45-60% of domestic coal mix, compared to 23-30% of domestic coal consumption earlier. In Q2 FY24, the domestic mix stood at 45%, followed by 30% mix in Q3.

Domestic coal mix enjoys a high ask and lower cost coal, which aided in bringing down the power cost as well, Misra said.

The company also worked on re-negotiating its contracts, bringing down its contract costs and improving mining grade from 6.5% last year to 7.4% this year.

The zinc LME prices at $2,498 per ton continued to remain on a declining trend year-on-year. However, it did showcase a 2.8% uptick sequentially. Hindustan Zinc expects these prices to remain rangebound for another quarter in the $2,500-2,550 range and expects signs of improvement once the Chinese economy bounces back in Q1 FY25 and expects to go up to $2,800/ton.  

“Once European economy comes back to life, the consumption in Europe increases, then we can see $ 3,000/ton, so need to wait for another 2-3 quarters on that," Misra said.

The company maintains its silver production guidance at 725-750 tonnes, despite the ramp of new fumer.

Hindustan Zinc will see an additional 5-6 tonnes production in the current quarter, with full stabilisation in fumer, and can expect additional 30 tonnes from next fiscal, Misra said.

• Revenue down 7.1% at Rs 7,310 crore vs Rs 7,866 crore.

• Ebitda down 5.02% at Rs 3,521 crore vs Rs 3,707 crore.

• Margin up 104 bps at 48.16% vs 47.12%.

• Net profit down 5.9% at Rs 2,028 crore vs Rs 2,156 crore.

Citi maintains a 'sell' rating on the stock, with a target price of Rs 275, on concerns around cash use and limited upside to zinc LME prices.

HZL had net debt of Rs 370 crore as of December 2023, as compared to net cash of Rs 70 crore as of September 2023, the brokerage said in a note.

It expects dividend payouts to be limited to 100% from FY25 and incorporate dividend payout of Rs 23 per share for FY25/26E, which implies a cash outflow of around Rs 9,700 crore.

BofA maintained an 'underperform' rating, with a target price of Rs 220 per share.

The brokerage noted that Ebitda and Profit After Tax were in-line with estimates. It expects zinc prices to trade at marginal costs without more meaningful supply cuts.

Shares of Hindustan Zinc Ltd. opened flat, compared to a 0.39% rise in the benchmark Nifty 50 on Saturday.