Gleaming Prospects - Hindustan Zinc
Rising metal prices and a strong management with deep pockets catapulted Hindustan Zinc (HZL) into a standout performer in the year gone by. And 2010 may well extend the company’s winning streak. So how did the Vedanta group company manage to get an edge over the others? Well, some prudent financial management, steady demand for zinc and low employee turnover chipped in to help the company sail through a difficult year. This year, metal companies can expect to breathe a little easier as the global economy slowly but surely gets back on its feet, which should bolster
Let’s start with a lowdown on the commodity itself. Currently almost half of the zinc used in the world is for galvanising steel or iron, coating the metal to protect it from corrosion. Zinc is also used to make brass, an alloy with copper. Other industrial uses like rubber making and healthcare use a substantial portion of zinc output. Zinc producers typically also produce lead and silver as by-products.
China is the world’s largest consumer of zinc, devouring more than a third of global output. India accounts for 4 per cent of annual global supply. Domestically, experts say the prospects for zinc consumption are humongous. Global consumption of zinc stands at an average 1.8 kg per annum; India, meanwhile, consumes just 0.4 kg. Hindustan Zinc is the monopoly producer of zinc in the country. Part of the UK-listed Vedanta group, it is also the second largest zinc manufacturer in the world. About 70 per cent of revenues come from zinc, while another 10 per cent comes from lead and about 3 per cent from selling silver.
Right now, zinc makers are having a good time. Steel companies, the biggest consumers of zinc, are reporting a revival in fortunes, which should be music to the ears of Hindustan Zinc shareholders. In addition to gleaming prospects at home, the company is also looking at overseas markets to bulk up revenues.
The past two years have been particularly bad for metal companies as prices tumbled across the board, heaping misery on some of the more leveraged players.
It was so bad that the initial part of 2009 saw investors shun stocks like Tata Steel and Hindalco, both of which had mountains of debt on their balance sheets due to the funding of overseas acquisitions. In sharp contrast, Hindustan Zinc turned into a safe bet as it navigated its way out of an uncertain environment quite effectively and with minimal financial damage.
On a roll
Zinc prices have almost doubled from the lows of December 2008
How did the company manage such a tumultuous year? “Despite a slow economy, our volumes continued to grow,” responds Akhilesh Joshi, chief operating officer of Hindustan Zinc. Steady demand helped. “Zinc demand in India has remained fairly robust. We are selling about 10 per cent more in 2009 than what we sold in calendar year 2008.” Because the company also places a high emphasis on developing and nurturing talent internally, it also experienced a very low attrition rate. Confidence-building measures, like additional recruitment during downturns and no job cuts, have also helped, adds Joshi.
Indeed, even as companies were laying off employees across sectors, Hindustan Zinc was rated the second best employer in India by Hewitt Associates in 2009. It also ranked among the top 25 best employers in Asia. While the defining moment for the company’s fortunes dates back to 2002, when it was acquired by the Sterlite group in a government disinvestment drive, Hindustan Zinc has maintained an impressive tempo of activity in the years since.
From having no captive power plants, it today boasts 314 mw of thermal power and 123 mw of wind power capacity. It’s a significant development, since power accounts for a big chunk of production costs for metal companies.
An improved internal focus also helped. The company, through its continuous exploration focus with technological help, has improved the available resources by 110 billion tonne of ore between 2003 and 2008.
Enviable vital stats
The operating metrics of the company are enviable. From a turnover of Rs 1,470 crore in FY02, the company was clocking in revenues of Rs 8,560 crore by FY07. While the company will rake in lower revenues this fiscal year (top line growth is firmly meshed with LME zinc prices), the profitability and cash generation ability of Hindustan Zinc continue to be impressive.
Giriraj Daga of Khandwala Securities estimates the cash levels of the company were close to Rs 10,000 crore or Rs 241 per share by September 2009. Another analyst, Ashutosh Tiwari of K R Choksey (KRC), describes Hindustan Zinc as a “cash machine”.
What is the company doing with this treasure chest of cash? Well, some part is going into funding expansions. KRC’s Tiwari estimates that up to Rs 3,600 crore could be used. Current expansion plans include adding to the zinc and lead smelters, mine expansion and captive power addition.
“With the completion of a 210 kilo tonne per annum (ktpa) zinc smelter and a 100 ktpa lead smelter, HZL will become the world’s largest integrated zinc-lead producer with a production capacity of 1064 ktpa,” says Joshi. Looking ahead, the focus for Hindustan Zinc could be outside the country as much as within. “Globally, the demand recovery signs are becoming evident,” says Joshi, a veteran who has worked for more than three decades at Hindustan Zinc. “Demand growth is mainly expected to come from the developing nations including Asia, which is our main export focus.” In the domestic market, Joshi expects demand from infrastructure and telecom.
Bright start to the year
How does the outlook for 2010 look? Joshi’s confidence comes to the fore when he says that “prices are expected to remain fairly strong as the world economy sees further recovery. Our production costs are very competitive globally, and we remain focused on continuously lowering costs and expanding volumes to improve our margins and the bottom line.”
From here on, he says, “cost and volume will be the key differentiators. We are one of the world’s lowest cost producers and are continuously trying to reduce costs further. We will become the world’s largest integrated zinc-lead producer by 2010, augmenting the economies of scale.”
Analysts reckon that’s a fair assessment of the company. KRC’s Tiwari, for instance, says he has no doubts about the company’s cost effectiveness, but says he is wary about zinc prices this year, given that the dollar is expected to recover somewhat and global liquidity may be pulled back. He forecasts that zinc prices could fall to $2,100 per tonne in 2010 from the current $2,600 per tonne.
Domestically, he estimates demand for zinc could be nearly 1.5 times GDP growth. Other local bodies have also upped their forecasts for zinc demand, which is good news for Hindustan Zinc.
The stock was a 2009 investor favourite, as it thundered past life-time highs, even though the BSE metal index came nowhere close to its life-time peak. With strong economic growth expectations, good times for the stock look likely to continue, though perhaps not at the dizzying pace one saw last year.
While K R Choksey has a ‘reduce’ rating on the stock with a target of Rs 1,055, India Infoline has a price target of Rs 1,319, an upside of 6 per cent from current levels of Rs 1241.
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