Value
Investment Analysis Report
Basic Filtering Criteria:
HZL Share's Market Snapshot on 25th November 2016 |
Critical prima-facie Observations:
- PE Ratio: Hindustan Zinc Limited (HZL)’s PE Ratio is 16.73 is marginally higher than the maximum permitted 15 and well above the Ideal for Indian conditions of 10 and therefore does not pass the hurdle.
- Price to Book Value Ratio: At 3.09, placed twice above the maximum recommended 1.50 times the book value fails to qualify.
- Distance from 52 week low: The current price of Rs.273.25 is 101.15% away from the 52 Week Low of Rs.135.80. On this parameter the scrip is NOT in the desirable or affordable zone – rather it is very near the 52 Week High of Rs.281.40.
- Dividend Yield: A dividend yield of 10.18% is very attractive.
In light of the
above conditions, Hindustan Zinc (HZL) should have been rejected out right but
having invested in the scrip available at reasonable price recently shall cautiously
be accepted for further study.
A. Company Performance
Profitability Analysis
Hindustan
Zinc Limited.
Profit
and Loss Account
(Rs. in Crores)
|
March 31' 2013
|
March 31' 2014
|
March 31' 2015
|
March 31' 2016
|
Net
sales
|
12,699.84
|
13,636.04
|
14,788.39
|
14,226.44
|
% age rise (+) or fall (-)
|
11.35%
|
7.37%
|
8.45%
|
-3.80%
|
Cost of sales:
|
||||
Mining
& Manufacturing, Purchase and Raw material costs
|
793.06
|
501.26
|
520.75
|
51.34
|
Changes
in Stock of WIP & FG
|
-112.54
|
-155.16
|
-145.45
|
183.46
|
Employee
Benefit Expenses
|
649.91
|
680.06
|
868.91
|
786.17
|
Depreciation
|
647.04
|
784.59
|
644.19
|
712.62
|
Other
Expenses
|
4887.77
|
5648.36
|
6124.60
|
6564.85
|
Interest
|
29.10
|
44.94
|
23.51
|
16.93
|
SUB-TOTAL
|
6894.34
|
7504.05
|
8036.51
|
8315.37
|
Operating
profit after interest
|
5,805.50
|
6,131.99
|
6,751.88
|
5,911.07
|
Net
other non-operating income/expenses
|
2,032.15
|
1,899.39
|
2,821.05
|
2,729.42
|
Profit
Before Tax
|
7837.65
|
8031.38
|
9572.93
|
8640.49
|
Provision
for taxes
|
920.64
|
1065.09
|
1392.12
|
443.80
|
Profit
After Tax (PAT)
|
6917.01
|
6966.29
|
8180.81
|
8196.69
|
Less: Exceptional Items
|
17.53
|
61.67
|
2.81
|
|
Net Profit Carried Over to Balance Sheet
|
6899.48
|
6904.62
|
8178.00
|
8196.69
|
EBDITA
(Operating Profits)
|
6481.64
|
6961.52
|
7419.58
|
6640.62
|
EBDITA
(Operating Profits) %
|
51.04%
|
51.05%
|
50.17%
|
46.68%
|
Depreciation
|
647.04
|
784.59
|
644.19
|
712.62
|
EBITA
|
5834.60
|
6176.93
|
6775.39
|
5928.00
|
EBITA %
|
45.94%
|
45.30%
|
45.82%
|
41.67%
|
Interest
(Operating/ Relating to Business)
|
29.10
|
44.94
|
23.51
|
16.93
|
Interest
Cost to Sales - %
|
0.23%
|
0.33%
|
0.16%
|
0.12%
|
EBT
|
5805.50
|
6131.99
|
6751.88
|
5911.07
|
EBT
%
|
45.71%
|
44.97%
|
45.66%
|
41.55%
|
Net
Non-Operating Income
|
2032.15
|
1899.39
|
2821.05
|
2729.42
|
FINAL
PBT
|
7837.65
|
8031.38
|
9572.93
|
8640.49
|
FINAL PBT %
|
61.71%
|
58.90%
|
64.73%
|
60.74%
|
Income
Tax
|
920.64
|
1065.09
|
1392.12
|
443.80
|
PAT
|
6917.01
|
6966.29
|
8180.81
|
8196.69
|
PAT
%
|
54.47%
|
51.09%
|
55.32%
|
57.62%
|
Remarks:
- HZL’s profitability margins are excellent even in the present global recessionary conditions and low commodity prices.
- Negligible interest costs is definite plus point.
- Net non-operating income constitutes 46.17% of operating profits (EBT), which means that company will be able to maintain dividends even if operating income is affected.
Hiindustan Zinc
Limited’s profitability ratios are excellent.
Balance Sheet Analysis:
Hindustan
Zinc Limited.
Balance
Sheet
(Rs. in Crores)
|
March 31' 2013
|
March 31' 2014
|
March 31' 2015
|
March 31' 2016
|
Liabilities
|
||||
Short-Term
Borrowings
|
0.39
|
-
|
-
|
-
|
Sundry
Creditor (Trade)
|
484.20
|
510.32
|
630.79
|
778.77
|
Other
Current Liabilities & Provisions
|
1,396.99
|
2,034.26
|
2,357.44
|
14,396.79
|
Total
Current Liabilities
|
1,881.58
|
2,544.58
|
2,988.23
|
15,175.56
|
Term
Loans
|
-
|
-
|
-
|
-
|
Deferred
Tax Liability
|
1279.86
|
1658.11
|
2518.62
|
2571.30
|
Other
Term Liabilities
|
28.23
|
56.37
|
132.08
|
|
Total
Term Liabilities
|
1,308.09
|
1,714.48
|
2,650.70
|
2,683.09
|
Total Outside Liabilities
|
3,189.67
|
4,259.06
|
5,638.93
|
17,858.65
|
Ordinary
Share Capital
|
845.06
|
845.06
|
845.06
|
845.06
|
Reserves
& Surplus
|
31430.68
|
36572.55
|
42508.01
|
36540.13
|
Net
Worth
|
32,275.74
|
37,417.61
|
43,353.07
|
37,385.19
|
Total
Liabilities
|
35,465.41
|
41,676.67
|
48,992.00
|
55,243.84
|
Assets
|
||||
Cash
And Bank Balances
|
6942.10
|
3031.42
|
3531.51
|
52.73
|
Current
Investments
|
14537.18
|
22503.58
|
27253.59
|
35182.40
|
Receivables
Other Than Deferred & Export
|
402.87
|
399.51
|
658.82
|
244.06
|
Inventory:
|
1111.09
|
1198.24
|
1211.75
|
1058.22
|
Other
Current Assets
|
766.40
|
913.56
|
548.13
|
551.96
|
Total
Current Assets
|
23,759.64
|
28,046.31
|
33,203.80
|
37,089.37
|
Fixed Assets - Net Block
|
8473.69
|
9023.43
|
9329.05
|
9821.27
|
Capital Work In Progress
|
1081.85
|
1540.94
|
2004.71
|
2362.84
|
Total
|
9555.54
|
10564.37
|
11333.76
|
12184.11
|
Non
Current Investments
|
2.70
|
2.81
|
||
Long
Term Loans & Advances
|
1898.29
|
2939.36
|
4337.32
|
5850.30
|
Other
Non Current Assets
|
239.19
|
0.00
|
||
Total
Other Non-Current Assets
|
2,140.18
|
2,942.17
|
4,337.32
|
5,850.30
|
Intangible
Assets
|
10.05
|
123.82
|
117.12
|
120.06
|
Total
Assets
|
35,465.41
|
41,676.67
|
48,992.00
|
55,243.84
|
Tangible Net Worth
(TNW)
|
32,265.69
|
37,293.79
|
43,235.95
|
37,265.13
|
Current Ratio
|
12.63
|
11.02
|
11.11
|
2.44
|
Total Outside Liabilities/ Tangible Net Worth
|
0.10
|
0.11
|
0.13
|
0.48
|
Total Term Liabilities/Tangible Net Worth
|
0.04
|
0.05
|
0.06
|
0.07
|
Highlights:
- HZL is totally debt-free, which is a great advantage.
- In FY 2015016, current liabilities have steeply risen and reserves have sharply fallen since HZL declared special golden jubilee year dividends.
- Current ratio has fallen from previous year’s 11.11 to 2.44 but still is healthy being well above stipulated 2.
- TOL/ TNW ratio is very healthily at 0.48 is very healthy.
- Long-term Deb-Equity ratio is attractively far less than the recommended not more than 1.
Therefore on the balance sheet
front all parameters are very strong.
Cash Flow Analysis:
Hindustan
Zinc Limited.
Cash
Flow Statement
(Rs. in Crores)
|
March 31' 2015
|
March 31' 2016
|
Free Cash Flows from Operating
Activity as reported
|
5530.70
|
6499.90
|
Net
Increase in Fixed Assets
|
-1611.03
|
-1579.09
|
Interest
and Dividend received
|
767.82
|
513.17
|
Bank
Balances Not Considered as Cash and Cash Equivalents
|
-678.36
|
3479.64
|
Net
Purchase of Current Investments
|
-2285.39
|
-5691.96
|
Total Cash Flow From
Investing Activity
|
-3806.96
|
-3278.24
|
Interest
and Finance charges
|
-23.51
|
-16.93
|
Dividend
and Dividend tax
|
-1878.50
|
-3203.87
|
Total Cash Flow from
Financing Activity
|
-1902.01
|
-3220.80
|
Grand Total of Net
Cash Flows
|
-178.27
|
0.86
|
Percentage of Free
Cash Flows Distributed as Dividend
|
33.96%
|
49.29%
|
Percentage of Free
Cash Flows Invested in Fixed Assets
|
29.13%
|
24.29%
|
Highlights:
- HZL is generating handsome free cash flows from its operations.
- A generous portion of free cash flows is being distributed as dividends.
- A respectable proportion of free cash flows is being invested in expansion, which can be expected to generate more cash.
On the cash flows front HZL’s performance
is commendable.
Dividends
Distribution of net Profits
Let
us study the dividend distribution pattern of HZL:
(Rs. in Crores)
|
March 31' 2013
|
March 31' 2014
|
March 31' 2015
|
March 31' 2016
|
PAT
|
6917.01
|
6966.29
|
8180.81
|
8196.69
|
Dividend
|
1309.85
|
1478.86
|
1859.14
|
14137.68
|
Dividend
% of PAT
|
18.94%
|
26.69%
|
22.73%
|
172.48%
|
The above table shows that the company
has been distributing decent portion of the net profits as dividends. In the
financial year 2015-16, special dividend has been declared on the occasion of
golden jubilee.
On this count the company performance is good.
Five-year price graph:
Five year price graph of HZL Share |
From
the graph we can see that the market has been chasing this scrip, pushing the
price from around Rs.121 by end June 2015 to the current level of Rs.273, a
whopping 125.62%. Why? Because when all mineral, metal and commodity companies
were experiencing severe margin squeeze, HZL was the only company that had
bucked the trend and showed no significant drop in margins.
In
conclusion the five year price graph of Hindustan Zinc shows that presently the
share is at it’s five year peak and this is not a favourable market condition
for buying the stock.
Five years returns (price rise):
Picture shows the price return (increase) in HZL Share in the last five years |
In synchrony with the five year price graph, the five years return of HZL share of 141.49% too indicates
that the price of the share has appreciated one and a half times in the past
five years. Therefore the market condition under this parameter too is
unfavaourable.
Distance
from 52-Week Low:
52-Week Low: Rs.135.80
52-Week
High: Rs.286.40
Current
Market Price (CMP) on 25th November 2016: Rs.273.25
The current price of Rs.52 is 101.15% away from the 52 Week
Low of Rs.135.80.
On this parameter
the scrip is NOT in an attractive zone – rather it is very near the 52 Week
High of Rs.286.40.
Final Conclusions:
- The above brief analysis proves that Hindustan Zinc is without doubt a great company.
- The EBDITA, EBT and PAT margins are excellent and the company is consistently profitable for many years into the past.
- HZL does not carry any debt on its books.
- All liquidity and solvency ratios demonstrate strength.
- Free cash flows are copious and well deployed.
- PE Ratio of 16.73 is primarily on account of market conditions.
- Price to Book Value Ratio (P2BV) of 3.09 is on account of sudden drop in book value of share on the back of utilization of reserves for paying a large special dividend on the occasion of golden jubilee and market conditions.
- The market condition parameters of five-year price graph and distance from 52 Week low and five year returns do not favour.
- Though the company is distributing a good proportion of the profits as dividends, the high market price has pulled down the dividend yield.
Final Investment Advice:
- Hindustan Zinc (HZL) is a wonderful company but presently market conditions are not favorable.
- Wait for a price correction.
- This is not the time for investments in this scrip.
- You must certainly start buying the share when PE Ratio is below 15.
- Eventually you must include HZL in your portfolio and without it your portfolio will be incomplete.
Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.
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