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Hindustan Zinc shares hit hard as co buys Vedanta's Zinc Int'l assets. Expensive deal, say analysts

Hindustan Zinc shares hit hard as co buys Vedanta's Zinc Int'l assets. Expensive deal, say analysts

Hindustan Zinc’s earnings should remain firm but the takeover of Zinc International at an expensive valuation would wipe out cash, Nuvama Institutional Equities said.

Hindustan Zinc’s acquisition of Zinc International assets are expensive on current earnings, as growth optionality has high execution risk, said Kotak Institutional Equities. Hindustan Zinc’s acquisition of Zinc International assets are expensive on current earnings, as growth optionality has high execution risk, said Kotak Institutional Equities.

Shares of Hindustan Zinc plunged 9 per cent in Friday's trade after the company said it would buy Zinc International's assets from parent Vedanta. The announcement marred an other wise in line December quarter results reported by the Anil Agarwal firm.  Kotak Institutional Equities said it has raised FY24 estimates to incorporate the cost reduction benefits.

"The assets have significant growth potential, given rich resources; however, we find the acquisition expensive on current earnings, as growth optionality has high execution risk. We cut our FV to Rs 270 from Rs 285) and downgrade the stock to sell from reduce," it said.

Nuvama Institutional Equities said Hindustan Zinc announcement of acquiring Zinc International assets of parent Vedanta for $2.98 billion  at 14.9 times FY24 EV/Ebitda overshadowed its December quarter earnings. Additionally, HZ announced a third interim dividend of Rs 13 per share and agreed to pay 2 per cent of turnover as brand fee to promoter, it noted.

"While Hindustan Zinc’s earnings shall remain firm, the takeover of Zinc International at an expensive valuation would wipe out cash. Despite raising its FY23/24/25E EPS by 6 per cent/5 per cent/3 per cent to factor in higher zinc prices, we are cutting the target valuation to 6 times from 6.5 times in the wake of the above transaction," Nuvama said while cutting its target on stock to Rs 276 from Rs 292 earlier.

Motilal Oswal said the acquisition will give Hindustan Zinc access to a resource base of 35 mt with over 30 years of mine life. The acquisition will help Hindustan Zinc ramp up from 1.2 mt capacity to 2mt-plus capacity, while giving access to countries in Africa, Europe, and North America, it said.

"We have raised our FY24 estimates to incorporate the cost reduction benefits. At its current levels, HZ is trading at a rich valuation of 6.7 times FY24 EV/Ebitda. We reiterate our neutral rating on the stock for a target price of Rs 350 (6 times FY24EV/Ebitda)," Motilal Oswal said.

 


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Published on: Jan 20, 2023, 9:59 AM IST
Posted by: Tarab Zaidi, Jan 20, 2023, 9:54 AM IST