Hindustan Zinc a cash cow: What the massive dividend means to you, govt & Agarwal

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NEW DELHI: Cash cow is the term market men use when they talk of Hindustan Zinc, the Vedanta group company, which has doled out Rs 27,157 crore in dividends (including dividend distribution tax) in this financial year.

The amount includes Rs 13,985 crore in special dividends that the company announced on Wednesday.

For the government, which has a residual stake in the company, the hefty Rs 11,259 crore dividend – based on its 29.5 per cent stake in the company – would help it cut fiscal deficit as the record date is set on March 30, 2017.

For Hindustan Zinc shareholders, while the Rs 27.5 per share dividend is a mega treat, the stock does not promise much upside as suggested by the target prices that top foreign brokerages have set for the stock.

Credit Suisse, which prefers the Vedanta stock over Hindustan Zinc, said the dividend outflow would drain nearly 55 per cent of the company’s cash on balance sheet. The hefty dividend suggests Hindustan Zinc promoters do not expect a government stake sale anytime soon, it said.

“It is a cash cow and, therefore, Agarwal is insisting that he gets whatever stake is sold, because once the government’s stake comes down below 26 per cent, it cannot get any special resolution passed. So, it will need to use this cash for other group companies. This is good for the group per se,” said VK Sharma, Private Client Group at HDFC Securities.

That said, top company officials have dismissed reports that Vedanta wants to buy out the government’s residual stake in the company.

Jatin Damania of Kotak Securities believes if the stake sale does not happen in the near future, Hindustan Zinc will continue to report higher dividend payout.

While Credit Suisse has a target price of Rs 340 on the stock, Deutsche Bank sees it at Rs 364. The brokerage expects significant improvement in company’s RoEs, 700 bps rise to 33 per cent, after the payout.

“We see improved confidence in higher dividend payout in future, which can support a re-rating of the stock,” the brokerage said, adding that the current premium valuation for HZL should sustain, given the strong pricing outlook for zinc.

JP Morgan expects Vedanta to return the cash to shareholders. It believes the move may cut net debt of the parent entity. “One key near-term catalyst is a formal approval for the merger with its oil subsidiary Cairn,” the brokerage said on Vedanta.