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Much needed growth optionality, albeit at expensive valuations

Hindustan Zinc reported 3Q EBITDA of INR37.1bn, in line with JMfe. HZL’s board approved the subscription to equity shares of THL Zinc Limited, Mauritius - Zinc International operations of Vedanta ltd. The acquisition is being undertaken for a cash consideration not exceeding US$3.0bn implying valuations of ~11x EV/ EBITDA (adjusting for 70% stake in Gamsberg - valuation could be 12-13x EV/ EBITDA). The consideration is expected to be paid in a staggered manner with 80% or $2.4bn (or Rs200bn) expected in near-term and balance upon regulatory approvals in S Africa and Namibia. The acquisition will offer HZL growth optionality given the potential to develop capacity of ~1 mn ton over the next ~6-7years thereby doubling HZL’s overall capacity. The acquisition being a related party transaction will also require majority approval of minority shareholders which includes the Government of India’s stake of 29.5% (classified under public shareholding on the exchanges). While the acquisition (if it goes through) will add significant value over the longer term, the expensive valuation is likely to weigh on near term stock performance. The board also approved third interim dividend of INR13/sh. aggregating to total interim dividend of INR49.5/sh for FY23. We value the stock at 6.5x FY25E EV/EBITDA (refer exhi.4). Maintain BUY.

* Acquisition of Vedanta’s Zinc Intl. operations to offer growth optionality – albeit at expensive valuations:HZL’s board approved the subscription to equity shares of THL Zinc Limited, Mauritius - Zinc International operations of Vedanta ltd. The acquisition is being undertaken for cash consideration not exceeding US$3.0bn implying valuations of ~11x EV/ EBITDA (adj for 70% stake in Gamsberg - valuation could be 12-13x EV/ EBITDA). The consideration is to be paid in a staggered manner with 80% or US$2.4bn expected in near-term and balance upon regulatory approvals in S Africa and Namibia. The acquisition will offer significant growth opportunity given Zinc International’s capacity is expected to double by FY25 to 600kt with another 300kt mine at Gamsberg and then rise to 1mt by FY27/28. HZL plans to fund the acquisition through a combination of internal accrual and debt either on its own book or the books of THL Zinc Ltd (currently debt free). The entire consideration will flow to Vedanta Ltd given THL Zinc Ltd is owned by Vedanta’s wholly owned subsidiary. The acquisition being a related party transaction will require majority approval of minority shareholders which includes GOI’s stake of 29.5% (which is classified under public shareholding on the exchanges). The company shall seek shareholder approval in Feb while other approvals are expected within 18 months

* Lower realisations impact revenue sequentially: The Company registered sequential decrease of 5.6% in sales, primarily due to lower zinc LME, lower lead / silver volumes and lower gains from strategic hedging partly offset by favourable exchange rates, improved zinc volumes and improved lead/silver prices. Zinc COP before royalty stood at US$1,293 (INR106.2k), up 2.7% QoQ. COP remained high on account of elevated coal prices, input commodity inflation and lower domestic coal (linkage) availability partially offset by higher volumes & improved operational efficiencies. Consequently, EBITDA for the quarter at INR37.1bn was down 15.9% QoQ.

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