Hindustan Zinc announces special dividend of Rs 13,985 crore

Hindustan Zinc on Wednesday announced a special dividend of Rs 13,985 crore. The record date for the special interim dividend is March 30.

At a meeting on Wednesday, the board approved a special interim dividend of Rs 27.50 per share at a face value of Rs 2 per share.

The company said its total payout for the current financial year now stands at Rs 27,157 crore, of which the government will get Rs 11,259 crore.

Coupled with earlier payouts, it is the largest-ever dividend outflow by any Indian company in a financial year.

The government has a 29.5 percent residual stake in the company, of which Vedanta has majority control, and experts see the announcement of dividend as setting the stage for selling this stake.

Power minister Piyush Goyal had earlier told CNBC-TV18 that there was “no logic” in the government holding a stake in Hindustan Zinc. The government has set a disinvestment target of Rss 72,500 crore for the next financial year.

Market expert SP Tulsian of sptulsian.com said that the dividend payment will be credited in the accounts in this financial year itself. He said it will help shore up the government’s collections and he expects a stake sale to take place in the next three to four months.

Tulsian maintained a positive stance for the long-term but does not see much appreciation in the short-term.

Market expert Prakash Diwan of Altamount Capital said the announcement signifies that the government is on track to meet its divestment target and will be a nice upside trigger for investors.

Sanjiv Bhasin of IIFL said the move makes sense as the government wanted to strip dividend from the balance sheet. He said there is no point in retaining the stake and for investors, this is a good time to book profits.

Below is the transcript of the interview with SP Tulsian and Sanjiv Bhasin:

Q: At these levels and given the anticipated possibility of that residual stake sale going through, what would you advise investors to do with Hindustan Zinc?

Tulsian: As Varinder has specified now, the cash shares will rise tomorrow maybe by about Rs 7-8 because the differential, I do not think that any increase will be seen in the share price in the future. That way future should remain at Rs 290, add Rs 28, maybe one can see a price of Rs 318. Share will go ex on March 28, so it will come ex-dividend at Rs 290.

Thereafter the trigger on the residual stake sale will play on the company because Q4 numbers are seen to be quite good because if you see the performance having improved in Q3, better than Q3 performance will be seen in Q4. So those who have a medium-term to long-term view because I am expecting that probably the residual stake sale should happen in the next maybe 3-4 months. That will obviously happen in the next financial year.

So, if an investor is having a medium-term to long-term view of about 6-12 months, they should remain invested because probably the next figure of residual stake sale can see an upside of maybe about 8-10 percent from the current share price also because people will start deliberating on the expected price which is likely to be fetched by the government which as I said, it is likely to be at about anywhere between Rs 290-300. So, I am keeping a positive stance on those who are holding the stock with a medium-term view. But in the near-term share will go ex at around Rs 290 on March 28.

Q: This argument and I understand that this is the first time that the company has announced a dividend by March 28, so in essence, helping the government meet its estimates, as far as collections are concerned. One, it takes care of that and there is also this business of Vedanta needing funds to fund their Anglo-American stake so in the larger scheme of things, how do you read the many developments linked to this dividend announcement?

Tulsian: I do not think that Vedanta Group have been able to use the funds of Hindustan Zinc at any point of time in the past because of the nominee director existing on the board of the company, number one. Number two, I do not think that future acquisitions which are being talked of are seen to be happening in the personal capacity of Anil Agarwal of which you talked of the diamond mines and all that.

So, I do not think that again any amount is going to help the company, but you are right in saying that because this dividend will get credited in the accounts of the shareholder of March 30 or March 31. So, obviously, to catch the deadline because the record date is 30th and share is going ex on March 28. So yes, amount will get credited on or before March 31 and that is definitely to sure-up the collection of the government and that is what is happening.

But apart from that, one fact I just want to add here that company has only used 50 percent of that cash. They have Rs 28,000-30,000 crore and they have only used Rs 14,000 crore. And still, if you say, the cash of about Rs 35 per share is still held by the company in the books as on March 31, 2017. So, going forward, the valuations I think will play a very important role.

The core operations will get valued in my opinion at maybe 13-14 price-earnings ratio (P/E) multiple. I am expecting and earnings per share (EPS) of maybe about Rs 25 for FY18 of which Rs 5 will come from February operations. So, if you see the kind of zinc and lead prices have been moving. Even as of today, they are ruling at an average realisation of what the company has seen for Q3. So, I am expecting a very rich valuations coming in even if you take a P/E multiple of 13-14, that gives you a value of Rs 270 plus add Rs 30-35 cash.

So I am expecting that probably Rs 300-310 per share will be looked by the government, but that will obviously be taken in the next financial year. So, you are right that dividend will meet the requirement of the government for this financial year, but going forward, this will be seen positive even for the Vedanta group because then they will be having absolute control of the company with stake of maybe 92-93 percent stake in Hindustan Zinc and government will expeditiously go for the residual stake sale in next 4-6 months.

Q: A bumper dividend there being announced by Hindustan Zinc, your first reaction and what you believe this is now going to do as far as the stock is concerned?

Bhasin: It is called dividend stripping. I think the government has a slightly more longer term plan and they would be wanting to sell their residual part to the Vedanta group. So, it is a logical step. They want to strip the dividend as far as they can from the balance sheet. The stock has been a rock star in the last three years. I go back to 2004 or 2005 when actually the stocks market cap must have been one tenth of what it is now when actually the major stake was sold off to Sterlite. I think it makes sense for the government to sell the remaining stake, it is no point of keeping that. We know that the government is in the process of cleaning its balance sheet and trying to recover as far as sales of disinvestment. So, SUUTI and stake sales in some of these SUUTI shares, this would be on the agenda. So, a very positive and a very big thumbs up for the shareholders who have been rewarded excellently by this company over the last 10-15 years.

Q: What would you advise for retail investors at this point in time?

Bhasin: I think there will be a dividend arbitrage which will be there because it is a derivative component. Aside from that, I don’t see too much of an upside because we think the metals cycle, mainly the base metals may have come to peak prices and we know that globally now with the Trump rally now nearing fatigue level, I would advise people to actually sell and book profits because once the company goes into Vedanta then there will be a huge merger and so on. Right now it is a good time to book profits and sit on cash.

Q: A quick take now on the argument that SP Tulsian was making as far as the fundamentals and the valuation story is concerned?

Bhasin: That is the beauty of the metals. When they fall there is no bottom and when they rise sky is the limit. So, we have seen that metals have been an outperforming asset class globally and locally but I think here there is going to be a little bit of caution. Fundamentally Hindustan Zinc seems to be in a very good place. However we will have to see how it plays out because earlier also there was a lot of inter-company amalgamation which took place for the Vedanta group which actually did a negative for most of the shareholder value when you merged Sesa Goa with Vedanta and so on. So, I would be little pessimistic on that because we don’t know how the management would play out. If they do merge some of their loss making entities that would be a negative.

So, right now there is a lot of money on the table, it is time you book some profits on that.