The Zinc thing.
Hindustan Zinc-Equity Watch.
walletwatch.com
(At current market price of Rs 16, Hindustan Zinc seems worth a buy, opines Vinay Pandey-/Smart Investor-BS)
Last Tuesday, the cabinet committee on disinvestment cleared sell-off in nine PSUs. One of them was Hindustan Zinc where the government plans to divest 25 per cent. Moreover, zinc prices have rebounded to $1010 from a low of $900 a tonne last year. The company is also setting up a new 100,000-tonne smelter and has reduced its debt burden by Rs 227 crore in 1998-99. The scrip came in the limelight last week and hit circuit filters on both Thursday and Friday with huge volumes on BSE as well as NSE.
Contrary to expectations Hindustan Zinc (HZL) has managed to survive a tough 1998-99 with low global zinc prices. Net profit rose marginally to Rs 76.32 crore from Rs 73.77 crore over previous year. Turnover increased to Rs 1309.27 crore even though per tonne realisation plunged in the aftermath of the Asian crisis with zinc prices tumbling to $900 a tonne against $1,400 a year earlier. In volume terms, zinc production was up 3.5 per cent to 141,000 tonnes and lead rose 9 per cent to 39,010 tonnes.
HZL is the only primary producer of lead and zinc in the country and commands more than 50 per cent market share. Apart from being the largest producer of zinc and lead in the country, it also produces silver, cadmium and sulphuric acid as byproducts. However, zinc accounts for more than 80 per cent of its total turnover. HZL is comfortably placed as the industry estimates zinc demand to touch 250,000 tonnes this year against domestic supply of about 180,000 tonnes. HZL makes 149,000 tonnes while Binani makes 30,000 tonnes. In case of lead, the demand supply gap is even larger. Total lead capacity in the organised sector is 79,000 tonnes with HZL at 55,000 tonnes and Indian Lead at 24,000 tonnes. The projected domestic demand is over 150,000 tonnes for this year.
Despite a record sales of Rs 1309.27 crore in 1998-99 on account of a 17 per cent increase in volumes, operating margin fell to 14.4 per cent from 19.7 per cent. The low realisation per tonne affected the operating margin but the company has managed to protect its bottomline due to lower interest burden, a significant drop in tax and higher capacity utilisation at its Chanderia plant which enjoys low operating costs. It has repaid debt of Rs 227 crore which has resulted in interest cost going down from Rs 26.7 crore in 1997-98 to Rs 15.24 crore in 1998-99. The repayment has also resulted in its debt-equity ratio reducing to 0.1 from 0.37 last year. The most significant impact on the bottomline was due to reduction in provision for tax from Rs 128 crore in 1997-98 to Rs 74.83 crore in 1998-99.
It is setting up a greenfield 100,000-tonne zinc smelter at an estimated cost of Rs 1,000 crore in Rajasthan. At the same time it is expanding capacity of Debari Zinc smelter and Vizag Zinc smelter by 10,000 tonnes each. The new capacities would need additional ore for which HZL has entered into a joint venture with Australian mining giant Broken Hill Properties for grassroot exploration for lead and zinc in Rajasthan. The venture has already completed the first phase of airborne geophysical survey in Rajasthan and work has started on the second phase.
HZL is also working toward reducing its dependence on zinc and lead to hedge against the cyclical fluctuations in prices. As a first step two joint ventures, with BMRG of France and Vietnam Rare & Precious Minerals Corporation (VMC), to explore and develop gold mines in Vietnam have been formed. In association with CSIR, HZL is working on nickel extraction technology. This may lead to indigenous nickel production which is currently being entirely imported.
Though it has a dominant position in most of its products, the pricing is dictated by prevailing LME prices. Zinc prices have improved recently to about $1010 per tonne and is expected to be between $1000-1100 per tonne. Also, depreciation of rupee would mitigate any small price decline.
The newly discovered Agucha-Rampura mines in Udaipur have a metal content of more than 12 per cent compared to the world average of 9 per cent and the Indian average of 1.85 per cent. HZL is in the process of cutting down production from other mines having low metal content and sourcing ore from these new mines. This coupled with higher capacity utilisation from Chanderia smelter should improve operating margins in the coming years. Though wage revision would add to costs the company is likely to fare better this year.
One drawback is the huge equity base of Rs 422 crore of which 75 per cent is held by the government. But the company is likely to perform better this year. At current market price of Rs 16, the scrip seems worth a buy. |
