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Due Diligence of Hindustan Zinc
PSU Disinvestment through
Stratergic sale
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Overview of the presentation
Brief Snapshot of Hindustan Zinc Limited (HZL)
Analysis of mines/smelters, assets, employees
Past Financials
Zinc Industry
Investment Perspective
Valuation
Time table for future
Transaction Details
Transaction Documents
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Brief Snapshot of HZL
Only integrated primary producer of zinc & lead in
the country
Accounts for almost 80% of the countrys zinc
production
Headquartered in Udaipur
Owns 6 mines (operates 4) and 4 smelters
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Capacities & Production
11 mths 12 mths (est)
Zn Ingots 161,300 MT 180,000 MT
PRODUCT CAPACITY PRODN. 2000-01 PRODN. 2001-02(9 mths)
Zn Ingots 169,000 MT 148,092 MT 132,542 MT
Lead Ingots 43,000 MT 34,840 MT 28,993 MT
Silver 86,000 kg 35,127 kg 36,946 kgSulphuric Acid 338,000 MT 271,714 MT 239,162 MT
Cadmium Ingots 740 MT 277 MT 298 MT
Copper Cathode 2,100 MT 213 MT 128 MT
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Mines & Smelters
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Mines - Details
MINE RAMPURAAGUCHA RAJPURADARIBA ZAWAR AGNIGUNDALA
Ore with Grade Lead-Zinc
Zn 13.70%
Pb 1.90%
Lead-Zinc
Zn 8.00%
Pb 2.10%
Lead-Zinc
Zn 4.63%
Pb 2.40%
Lead
Pb 2.10%
Capacity 4500 tpd 2400 tpd 4000 tpd 240 tpdType Open Pit Underground Underground Underground
Estimated Life 23 yrs 15 yrs 10 yrs (750,000 tpa)
+8 yrs (300,000 tpa)
11 yrs
Lease renewed
upto
March 13, 2020 May 29, 2010 March 29, 2010 November 21, 2013
Nearest City Bhilwara80 km Udaipur 80 km Udaipur 44 km Guntur 25 km
Cost of
Production
(2001-02)
Rs. 5,691 / MT Rs. 17,326 / MT Rs. 16,863 / MT Rs. 16,425 / MT
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Global Mining Cost Comparison
MINE RAMPURAAGUCHA
RAJPURADARIBA
ZAWAR
Cost of Production (Rs./T of
concentrate)
5,691 17,326 16,863
Concentrate Grade 54% 51% 55%
Cost of Production ($/T of
metal)
216 697 629
Breakeven cost at LME of
$800/MT and related TC/RC
321 321 321
Breakeven cost at LME of$900/MT and related TC/RC 380 380 380
Breakeven cost at LME of
$1000/MT and related TC/RC
439 439 439
Scope for improvement ($/MT
of metal)
- 376 / 317 / 258 308 / 249 / 190
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Smelters - Details
SMELTER CHANDERIYA DEBARI VIZAG TUNDOO
Metal Zinc & Lead Zinc Zinc Lead
Capacity Zinc 70,000 tpa
Lead35,000 tpa
59,000 tpa 40,000 tpa 8,000 tpa
Process Zinc
ISP
LeadPyro
Electrowinning Electrowinning Pot Sintering
Recovery
(2000-01)
Zinc 90.67%
Lead89.86%
95% 87% 87.15%
Nearest City Bhilwara45 km Udaipur 15 km Vizag Dhanbad 36 km
Cost of
Production
(2001-02)
Zn - Rs. 35,379 / MT
PbRs. 30,802 / MT
Rs. 53,150 / MT Rs. 53,344 / MT Rs. 59,848 / MT
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Global TC/RC Comparison
SMELTER CHANDERIYA DEBARI VIZAG
Cost of Zn Production
(Rs./MT)21,782 32,863 32,244
Cost of Zn Production
($/MT)447 674 661
TC/RC ($/MT of metal) at
LME of $800/MT479 479 479
TC/RC ($/MT of metal) at
LME of $900/MT520 520 520
TC/RC ($/MT of metal) atLME of $1000/MT
561 561 561
Scope for improvement
($/MT of metal)- 195 / 254 / 213 182 / 141 / 100
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Employees
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Employees
WORKMEN EXECUTIVES TOTAL CONTRACT
as on 30.6.01
As on 30.9.2000 9,482 1,339 10,821 3,254
As on 24.10.2001 8,625 1,306 9,931
VRS Accepted &
Paid
1,348 228 1,576
As on 1/3/02 7,277 1,078 8,355 3,254
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Employees (as on 1/3/02)Break-upEXECUTIVES WORKMEN TOTAL CONTRACT
(as on 30.6.01)
Smelters:
1. Chanderiya 184 631 815 652
2. Debari 100 1,022 1,122 456
3. Vizag 117 898 1,015 531
4. Tundoo 33 514 547 45Mines:
1. Rampura Agucha 110 606 716 490
2. Rajpura Dariba 113 1,201 1,314 422
3. Zawar Mines 180 1,822 2,002 375
4. Agnigundala 19 170 189 130
5. Sargipalli 32 1 33 0
6. Maton 16 23 39 3
Others 174 389 563 150
TOTAL STAFF 1,078 7,277 8,355 3,254
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Other Assets
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Other AssetsCity Location Nos. Nature Area (sq.ft)
Jaipur Bani Park (Flat) 2 Owned 1050 x 2
Bani Park (Flat) 1 Owned 1,650
Bangalore M. G. Road (Office) 1 Rented 1,139
Vijaynagar (Flat) 1 Owned 1,075
Vijaynagar (Flat) 1 Owned 1,278
Vijaynagar (Garage) 1 Owned 203
Delhi Nehru Place (Office) 1 Rented 1,290
Nehru Place (Office) 1 Rented 645
SCOPE-Lodi Road 1 Rented 1,079
SCOPE-Laxmi Nagar 1 Rented 6,000
Asiad Village (Flat) 1 Rented 1,241
Ring Rd. Lajpat Nagar
Guest House
1 Rented 6,600
Ghaziabad Devika Apartments 4 Owned 1020 x 4
Hyderabad Saifabad (Office) 1 Owned 3,613
Saifabad (Garage) 1 Owned 200
Saifabad (Flat) 1 Owned 1,714
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Other AssetsCity Location Nos. Nature Area (sq.ft)
Mumbai Nariman Pt. (Office) 1 Rented 1,650
Santacruz (East) - Flat 1 Owned 580
Santacruz (East) - Flat 1 Owned 566
Santacruz (East) - Flat 1 Owned 910
Borivili (East) - Flat 1 Owned 1,100
Borivili (East) - Flat 1 Owned 1,100
Kolkata A. J. C. Bose Rd., Tollygunge 2 Owned 1159 x 2
Car park 1 Owned
CIC Bldg, (Flats) 2 Owned 2324 x 2
(Car Park) 1 Owned 200
Udaipur H OYashad Bhawan Owned approx. 30,000
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Past Financials
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Summary P&L AccountsPastRs. mn.
1998-99 1999-2000 2000-01 2001-02(9 mths)
Net Sales 11,258 13,144 14,436 9,179
Other Income 368 499 198 237
Total Income 11,625 13,643 14,634 9,415
Total Expenditure 9,362 11,042 11,200 8,006
PBDIT 2,263 2,601 3,434 1,409
Depreciation 572 670 577 459
Interest 152 105 25 168
VRS amortised 290
PBT 1,539 1,826 2,832 494
PAT 763 904 1,692 218
Cash profit excluding
extraordinary items
1,417
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Summary Balance Sheet - Past
Particulars(Rs. mn.)
31.3.1999 31.3.2000 31.3.2001 31.12.2001(provisional)
Share Capital 4,225 4,225 4,225 4,225
Reserves & Surplus 5,572 6,218 7,377 7,642
Loans 940 150 57 642
Net Fixed Assets 6,557 6,482 6,642 6,485
Investments 830 830
Current Assets 7,163 8,676 7,649 7,045
Current Liabilities 2,983 4,564 3,462 3,008
Net Current Assets 4,180 4,112 4,186 4,037
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Cashflow Statement - Past(Rs. mn.) 1999-2000 2000-2001 2001-02 Q1-3
Opening Cash Balance 1257 1658 695
Sources
Net Cash Accruals 1574 2319 265
Increase in Loan Funds - - 600
Sale of Fixed Assets - - 158
Total 1574 2319 1023Uses
Decrease in Loan Funds 789 94 15
Inc./(Dec.) in Net Working Capital -469 1038 1433
Purchase of Fixed Assets 595 738 -
Purchase of Investments - 830 0
Dividend paid 258 582 -
Total 1173 3282 1448
Surplus/(Deficit) 401 (963) (435)
Closing Cash Balance 1658 695 260
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Key Ratios
Ratio 1998-99 1999-2000 2000-01
Current Ratio 2.18 1.53 2.14
Debt:Equity 0.09 0.01 0.00
RONW (%) 7.79 8.66 14.58
ROCE (%) 14.97 20.01 26.33
BVPS (Rs.) 23.19 24.72 27.46
EPS (Rs.) 1.81 2.14 4.00
Dividend (%) 4.25 5.5 12.5
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Realisations2000-01Tonnage of Zn-Pb 182,932
Rs. mn. Rs./MT %
Realisation (incl. Other income) 14,634 79,998 100.00%Variable Costs Raw Materials 2,278 12,451 15.56%
Power & fuel 2,628 14,368 17.96%
Other factory expenses 109 597 0.75%
Total 5,015 27,416 34.27%
Contribution 9,619 52,582 65.73%
Fixed Costs Salaries & Wages 2,790 15,254 19.07%
Other fixed expenses 3,394 18,555 23.19%
Total 6,185 33,809 42.26%
Total Expenditure 11,200 61,225 76.53%
PBDIT 3,434 18,773 23.47%
Depreciation 577 3,156 3.95%
Interest 25 135 0.17%
PBT 2,832 15,481 19.35%
Tax provision 1,130 6,177 7.72%
PAT (incl. Prior items) 1,692 9,250 11.56%
Net Cash Accruals 2,279 12,460 15.58%
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Realisations31.12.2001Tonnage of Zn-Pb 161,535
Rs. mn. Rs./MT %
Realisation (incl. Other income) 9,882 61,172.55 100.00%
Variable Costs 4,243 26,266.32 42.94%
Contribution 5,639 34,906.23 57.06%
Salaries & Wages 2,265 14,020.24 22.92%
Other fixed expenses 1,964 12,161.32 19.88%
Fixed Costs 4,229 26,181.56 42.80%
Total Expenditure 8,472 52,447.88 85.74%
PBDIT 1,409 8,724.67 14.26%
Depreciation 459 2,840.87 4.64%
Interest 168 1,038.17 1.70%
PBT 289 1,789.33 2.93%
Tax provision 494 3,056.30 5.00%
PAT 211 1,308.08 2.14%
Net Cash Accruals 959 5,938.28 9.71%
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Unit-wise Profitability
MINES SMELTERS
Zawar RD RA Debari Vizag Chanderiya
Employees
Workmen 1822 1201 606 1022 898 631
Executives 180 113 110 100 117 184
Base Production (T) Zn Concentrate Zn Metal
43,457 36,091 306,052 57,000 37,000 86,000
Cash profit (Rs. mn.) -127.78 -170.06 1,014.02 210.01 189.52 1,027.58
Pb Concentrate Pb Metal
17,605 7,799 18,325 33,000
Cash profit (Rs. mn.) 73.24 22.96 164.12 220.92
Total Cash Profit (Rs.
mn.)-54.53 -147.11 1,178.14 210.01 189.52 1,248.50
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Unit-wise Profitability
MINES SMELTERS
Zawar RD RA Debari Vizag Chanderiya
Production with capex
(T)Zn Concentrate Zn Metal
54,322 57,745 306,052 57,000 37,000 86,000
Cash profit (Rs. mn.) -103.26 -179.93 1,014.02 210.01 189.52 1,027.58
Pb Concentrate Pb Metal
22,007 12,478 18,325 33,000
Cash profit (Rs. mn.) 101.36 36.73 164.12 220.92
Total Cash Profit (Rs.
mn.)
-1.90 -143.20 1,178.14 210.01 189.52 1,248.50
VRS Cost (Rs. mn.) 1,591.5 1,042.0
Production of RD & Zawar mines can be substituted by increasing RA
production from 18 lakh tonnes to 23 lakh tonnes
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Major World CapacitiesRefined ZincCOMPANY CAPACITY (MT) %
Pasminco 656,000 12.59%
Korea Zinc 628,000 12.06%Union Miniere 476,000 9.14%
Cominco 391,000 7.51%
Asturiana (now with Xstrata) 335,000 6.43%
Glencore 307,000 5.89%
Falconbridge 245,000 4.70%
Noranda 244,000 4.68%Mitsui 239,000 4.59%
Outokumpu 225,000 4.32%
Metaleurope 224,000 4.30%
Industrias Penoles 220,000 4.22%
MIM 174,000 3.34%
Hindustan Zinc 169,000 3.24%
Zinc Corp America 148,000 2.84%
Norzink 143,000 2.75%
Grupo Mexico 105,000 2.02%
MG 100,000 1.92%
Padaeng 95,000 1.82%
Anglo American 85,000 1.63%
5,209,000 100.00%
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Consumption Pattern
49%
20%
14%
9%
8%
Galvanizing Brass & Bronze Zinc Alloys Chemicals Semi-manufactures
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Current Global Scenario
USA is the single largest consumer of Zinc (1.6 mn.
tonnes)
Europe is the single largest continent which consumes
Zinc (
2.3 mn. tonnes) World Production has grown by 6.4% in 2000 and
2.4% (in 2001)
World Zinc Consumption which grew by 6.3% in 2000
has reduced by 1.1% in 2001
Zinc prices continue to slide. In real terms, the lowest
level since the early 1940s
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LME Prices (Current Levels)
Cash = $ 813 / MT
18 mth Forward = $ 883 / MT
27 mth Forward = $ 913 / MT
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Current Indian Scenario
Zinc consumption in India higher compared toproduction
70% met internally, rest imported
Lower per capita consumption implies potential for
growth (0.24 kg compared to 0.8 kg in Brazil and 4 kg
in USA)
HZL & Binani Zinc, the only domestic producers, with
HZL being around 6 times the size of Binani
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Zinc - Production in India
29.
273
28.
321
31.
175
29.
162
29.
923
111.149
136.271 141.806 145.796
148.092
0
25
50
75
100
125
150
1996-97
1997-98
1998-99
1999-00
2000-01
'000
tonnes
BZL HZL
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Expected Global Scenario
Demand for Zinc is expected to remain stagnant
LME price to remain depressed in the short-term due to
surplus production and stocks
Future Outlook bright
2002 2003 2004 2005
Consumption (tonnes) 9,025,000 9,408,000 9,663,000 9,927,000
Supply (tonnes) 9,400,000 9,625,000 9,770,000 9,943,000
Supply/Demand Balance (tonnes) 375,000 217,000 107,000 16,000
LME Cash ($/tonne) 900 1050 1100 1150
Source: Barclays Capital
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Expected Indian Scenario
Indian Zinc demand expected to remain in line with the
economy though in the future it is expected to increase
due to infrastructural projects taking shape.
Supply-demand scenario unlikely to affect productionunless domestic prices continue to fall, in line with
LME price
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Overall Assessment of Investment
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Investment Perspective
Strengths
Track record of profit making
Ore grade in Rajpura Dariba and Rampura Aguchamines fairly high compared to grades availableinternationally
The Company has sites where preliminary explorationwork has commenced and indicates quality reserves
The Rampura Agucha mine has substantial reserves ofhigh quality and the cost of mining is also low
Debt-free company
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Investment Perspective
Strengths
Has net working capital exceeding Rs. 4000 mn.
Assets are available when Zinc LME at historical low
Reasonably professional management with faircommercial orientation
Conservative accounting practices maintained
Unforeseen liability unlikely write-backs possible
Huge other properties in terms of offices, residentialpremises/housing colonies
The staff members have not exhibited any overt signs ofhostility towards the process of privatisation
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Investment Perspective
Concern Areas
Zinc industry highly dependent on steel industry
Demand forecast for Zn not encouraging
Scattered locations of mines and smelters
Analysis of cost structures reveals that only RA mine is
viable at current LME levels
Profitability of the company sensitive to changes in
import duty structure(reduction) or fall in world prices Quality of rock at the RD mine
The availability of water in Rajasthan dependent on
annual rainfall.
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Investment Perspective
Concern Areas
Power costs are high
Salaries and wages is a large component of the total costs
Sargipalli and Maton mines are being closed. The non-VRS costs of the closure, if any, would need to be
examined in detail. Agnigundala mine and Tundoo
smelter are also in the process of being closed. The
closure costs of these have to be examined.
Company produces significant amount of PW grade zinc
which has low demand and lower margins
Companys equity base is very high
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Assumptions Underlying Future
Projections and Valuation
A i
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Assumptions
ProductionBased on capacity
Pricing
LME-based, landed cost
Insurance & Freight etc is assumed at USD 30/t
Import Duty Structure as below
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Rate (%) 35 25 25 20 20 20 20
Clearance and domestic costs have been assumed at Rs. 1500/tCVD and SADD assumed at flat 16% and 4% respectively in the
calculation of effective duty
INR to depreciate at 5% p.a. against the USD
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Valuation
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Valuation
Book Value
Discounted Cash Flows
Comparable multiples Market Price
Other qualitative factors
Intangibles
Contingent and hidden liabilities
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DCF Valuation
DCF Valuation Parameters
Risk free rate = 8.00%
Market rate of return = 14.39%
Stock Beta = 1.2 (or 120%) Growth rate to perpetuity = 2.00%
Cost of Equity = 15.67%
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Transaction Details
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Shareholding on offer
GoI disinvestment in HZL26%
Open offer to be made subsequent to acquisition of
GoI stakeMinimum 20% Buyers Call Option: 6 months from Closing Date for
a period of 1 year - Upto 18.92%
GoIs Put Option: 30 months from Closing Date for a
period of 1 year Upto GoI stake of 26%
Buyers Second Call Option: 5 years from Closing
DateAll remaining GoI shares
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Share Purchase Agreement
1. Non-disposal Undertaking of 3 years2. Lock-in of shares for 3 years
3. Subsequent to successful bid, Open Offer for a
minimum of 20% stake mandatory4. Buyers Call Option - 6 months after closing date upto
18 months (Upto 18.92%). {at higher of Bid Price or
Market Value}
5. GoIs Put Option - 30 months after closing date upto
42 months (GOI retaining stake of 26 % to 31%). {at
the higher of Bid Price or Market Value}
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Critical clauses in the Agreements
6. SP Second Call Option5 years after closing dateall remaining shares of GoI {Fair Market Value asdetermined by independent valuer}
7. Right of First Refusal continues between SP & GoI
for 18 months from closing date8. No Tag-along or Drag-along clause
9. Post Closing adjustment removed. (Existing inBALCO)
10. GoIs right to inspect accounts removed
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Critical clauses in the Agreements
11. Embargo on further Capitalization for 2 years*
12. Only the items requiring 75% majority are listed as
veto rights under the SHA
13. GoI has reserved the right to offer 5% of the Sharesto HZL employees directly
* (except with the consent of the GoI)
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Future Projections
Profitability Projections
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Profitability ProjectionsRs. mn. 2001-02 2002-03 2003-04 2004-05
LME Price of Zn SHG
($/t)
H1880
H2
765
800 850 900
Tonnage of Pb-Zn 218,000 218,000 218,000 219,000
Net Sales 12,619 11,961 13,511 15,170
Other Income 292 150 150 150
Total Income 12,911 12,111 13,661 15,320
Total Expenditure 11,082 11,439 11,996 12,802
EBITDA 1,829 672 1,665 2,518
Depreciation 687 717 758 771
Interest 28 0 0 0
Other Liabilities 139 0 0 0
VRS Amortised 289 405 405 405
PBT 685 -449 502 1,342
PAT 508 -449 464 825
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Profitability Projections
Rs. mn. 2001-02 2002-03 2003-04 2004-05PBDIT / Sales 14.16% 5.55% 12.19% 16.44%
PAT / Sales 3.94% -3.71% 3.39% 5.39%
EPS (Rs.) 1.20 -1.06 1.10 1.95
Net Cash Accruals (Rs. mn.) 1,484 672 1,627 2,001
RONW 4.36% -3.85% 3.82% 6.37%
ROCE 5.58% -3.85% 3.82% 6.37%
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Balance Sheet Projections
Particulars
(Rs. mn.)
31.3.2002 31.3.2003 31.3.2004 31.3.2005
Share Capital 4,225 4,225 4,225 4,225
Reserves & Surplus 7,886 7,436 7,900 8,725
Loans 0 0 0 0
Gross Fixed Assets 14,887 15,547 16,207 16,407
Net Fixed Assets 6,395 6,339 6,240 5,669
Current Assets 6,737 6,106 7,134 9,023
Current Liabilities 3,008 2,943 3,004 3,092
D:E Ratio 0 0 0 0
Current Ratio 2.45 2.52 2.36 2.65
C hfl P j ti
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Cashflow ProjectionsParticulars (Rs. mn.) 2001-02 2002-03 2004-05 2005-06
Opening Balance 695 5 633 1,557
Sources of Funds
Funds from operations 1,829 672 1,665 2,518
Inc. in term loans 0 0 0 0
Dec. in NWC 409 658 0 0
Total 2,238 1,330 1,665 2,518
Use of Funds
Inc. in Fixed Assets 440 660 660 200
Inc. in NWC 0 0 144 179
Dec. in term loans 57 0 0 0
VRS Payments 1,445 578 0 0
Other Payments 926 0 39 517
Total 2,868 1,238 843 896
Surplus/(Deficit) (630) 92 822 1,622
Closing Balance 65.00 157.00 979.00 2,601.00
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Cost Structures
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RD MinesCost Structure
38%
17%
8%
6%
5%
5%
9%
12%
Salaries & Wages
Power
Royalty
Stores
R&M
Depreciation
Others
Admn. Expenses
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Zawar MinesCost Structure
46%
18%
8%
8%
3%
6%
6%
5%
Salaries & Wages
Power
Royalty
Stores
R&M
Depreciation
Others
Admn. Expenses
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RA MinesCost Structure8%
18%
29%
7%
7%
0% 4%
27%
Salaries & Wages
Power
Royalty
Stores
R&M
Depreciation
Others
Admn. Expenses
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Debari SmelterCost Structure
35%
45%
3%
4%0% 4%
9%Power & Fuel
Feed Material
Stores & Chemicals
Salaries & Wages
R&M
Depreciation
Others
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Chanderiya SmelterZn Cost Structure
23%
43%
13%
5%
6%
5%
5%
Power & Fuel
Feed Material
Stores & Chemicals
Salaries & Wages
R&M
Depreciation
Others
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Chanderiya SmelterPb Cost Structure
21%
51%
9%
5%
6%
4%
4%
Power & Fuel
Feed Material
Stores & Chemicals
Salaries & Wages
R&M
Depreciation
Others
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Comparable Multiples
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Comparable Multiples
COMPANY EV / EBITDA PRICE / BV2002
Pasminco 1.60 0.10
Falconbridge 5.40 1.00
Penoles 4.20 0.50Teck Cominco 5.10 0.70
Noranda 4.40 0.80
Xstrata 6.50 1.00
MIM 5.10 0.70
Grupo Mexico 10.70 0.50
Average 5.38 0.66
HZL Value (Rs. / Share) 16.53 18.61
Share Values
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Book Value (31.3.2001) Rs. 25.46
Book Value (30.9.2001) Rs. 27.06
Market Price as per SEBI Guidelines Rs. 18.39
(Rs. / Share) Full Equity
(@ 15.47%)
D:E = 1
WACC =
12.94%
D:E = 1.5
WACC =
13.26%
Fully
Levered
11%
1) LME plateau at $900/t 18.07 19.73 20.18 22.69
2) LME plateau at $1000/t 27.41 30.10 30.83 34.91
3) LME constant at $765/t 2.13 2.29 2.33 2.59
4) 1 + VRS for 2118 people 19.78 21.66 22.18 25.02
5) 1 + closure of condemned units 19.05 20.83 21.32 24.02
6) RA Mine + 3 Smelters 21.70 23.72 24.27 27.31
7) RA Mine+Chanderiya&Debari Smelters 20.90 22.84 23.37 26.30
8) RA Mine+Chanderiya&Vizag Smelters 20.75 22.69 23.22 26.15
9) RA Mine + Chanderiya only 20.51 22.44 22.96 25.88
10) LME at $750/t, Rupee dep. @ 3%,
import duty 35/25/20/15/10, COP/t to reduce
to Rs. 50,000/Rs. 45,000
15.61 17.08 17.48 19.70
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Past Financial Analysis
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Strategic Perspective
Sterlites presence in non-ferrous metals CopperOriginally present
AluminiumAcquisition of BALCO
GoldProspecting in Armenia
ZincNatural extension of presence in the non-ferrous area
Zinc industry less volatile than those of Copper andAluminium