Hindustan Zinc Limited Investment Research Report

Value Investment Analysis Report

27^th November 2016
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Basic Filtering Criteria:

HZL Share's Market Snapshot on 25th November 2016

Critical prima-facie Observations:

1. 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.
2. Price to Book Value Ratio: At 3.09, placed twice above the maximum recommended 1.50 times the book value fails to qualify.
3. 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.
4. 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: 

1. HZL’s profitability margins are excellent even in the present global recessionary conditions and low commodity prices.
2. Negligible interest costs is definite plus point.
3. 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: 

1. HZL is totally debt-free, which is a great advantage.
2. In FY 2015016, current liabilities have steeply risen and reserves have sharply fallen since HZL declared special golden jubilee year dividends.
3. Current ratio has fallen from previous year’s 11.11 to 2.44 but still is healthy being well above stipulated 2.
4. TOL/ TNW ratio is very healthily at 0.48 is very healthy.
5. 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:

1. HZL is generating handsome free cash flows from its operations.
2. A generous portion of free cash flows is being distributed as dividends.
3. 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 25^th 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:

1. The above brief analysis proves that Hindustan Zinc is without doubt a great company.
2. The EBDITA, EBT and PAT margins are excellent and the company is consistently profitable for many years into the past.
3. HZL does not carry any debt on its books.
4. All liquidity and solvency ratios demonstrate strength.
5. Free cash flows are copious and well deployed.
6. PE Ratio of 16.73 is primarily on account of market conditions.
7. 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.
8. The market condition parameters of five-year price graph and distance from 52 Week low and five year returns do not favour.
9. 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:

1. Hindustan Zinc (HZL) is a wonderful company but presently market conditions are not favorable.
2. Wait for a price correction.
3. This is not the time for investments in this scrip.
4. You must certainly start buying the share when PE Ratio is below 15.
5. 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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