We retain our ?buy? rating on Hindustan Zinc (HZL). We value HZL using a weighted average of EV/Ebitda multiple and the DCF methodology to arrive at our FY16e fair value of R187 a share (earlier R169) on account of (a) its strong operational profile; (b) 2014 FCF at $0.8 billion, 25+ years of mine life; (c) a robust balance sheet with cash of $4.3 billion at $-R60. HZL?s cash & equivalents ($4.3 billion) account for 38% of its current market cap.
In our view, minority stake buyout remains an overhang. Shareholders at Vedanta approved the maximum consideration limit for GOI?s minority stake in HZL (29.5%) to $3.482 billion (at $/Rof 62.1383). This implies a per share value of R149-173 a share, subject to whether or not the 49% stake in Balco is purchased (for a maximum of $487 million), as the aggregate consideration for HZL and Balco combined cannot exceed $3.482 billion.
If the transaction includes both HZL and Balco, the per share consideration for HZL reduces from R173 to R149 (same as August 9, 2012, approval). Even though HZL has strong fundamentals, the last approved value of R149-173 a share remains an overhang.
A competitive bidding method with multiple participants can help HZL public shareholders to earn a higher value.
By Espirito Santo Securities
