While India is looking at a stake sale in Hindustan Zinc (HZL) via the Offer For Sale (OFS) mode, it is expected to take longer due to lower-than-expected positive responses at the road shows. The stake sale can be made in multiple tranches of a maximum 5 percent each, once in a financial year with a gap of a defined number of months in between each transaction.

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With every 5 percent stake sale, the government loses one director in the company. Sources say that initial responses from road shows have been poor, due to a lack of comfort in valuations of Hindustan Zinc, which is trading at EV/EBITDA of more than seven times, compared with global peers at less than five times.

Anil Agarwal, founder and Chairman of Vedanta Resources, is hopeful for this divestment to sail through, as the non-receipt of the government’s approval is a hurdle in pursuing the proposed sale of Vedanta’s Zinc International Assets with Hindustan Zinc. According to an exchange filing of Vedanta in January 2023, the proposed sale of its Zinc International assets could be in a phased manner for a cash consideration of up to $2,981 million.

If Vedanta successfully acquires the additional 6 percent stake in Hindustan Zinc (current stake at 64.92 percent), the government‘s holding shall decline to 24 percent (currently at 29.54 percent). A less than 25 percent stake for the Government shall mean it losing the special rights over the company.

In an earlier interaction with CNBC-TV18, Agarwal said that the government had promised to divest its stake in Hindustan Zinc 20 years ago, “HZL will start going down without Vedanta deal. HZL needs to grow, it can more than double in size”.

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However, the government is not in favor of selling its entire stake directly to Vedanta keeping the interests of minority shareholders in mind. Alongside, it is falling short of its divestment targets and hence, a majority part of its stake sale is expected to take place via the OFS route only.

According to DIPAM, the government was targeting to sell part of its residual stake in Hindustan Zinc before the end of FY23. However, recently the government clarified that it was unable to sell its stake due to various litigations. Despite all the litigation processes ending, the government says it will be unsuccessful in selling its holdings in one stretch.

Furthermore, the government termed Hindustan Zinc's decision to approve the acquisition of Vedanta's global zinc assets as "irresponsible". Analysts expect the overhang on Vedanta’s Zinc International Assets deal to continue. “The proposed sale of Zinc International Assets to Hindustan Zinc is not expected to complete in the near term, until at least FY24. Even if the Government decides to reduce its stake to below 25 per cent, it will be crucial to see what the Government’s new say is in the Hindustan Zinc deal,” said an analyst requesting not to be named.

He added that, in case, the government’s holding declines from existing levels, similar transactions from the promoter group can get through at a faster pace in future. "The Zinc International Assets deal could fall under the purview of a related party transaction and also prima facie seems an expensive deal due to high valuations,” he said.

Other metal analysts say the impact will largely be on Vedanta and minimal on Hindustan Zinc. Rakesh Arora, Founder at www.goindiastocks.com, said: “Impact will be largely on the holding company of Vedanta, which is highly leveraged. If the deal does not go through, they shall not be able to take a higher dividend out of Vedanta. Expect little impact on Hindustan Zinc shares".

Over the past year, Vedanta has been unsuccessful in creating any wealth for its shareholders with share price declining over 25 percent, while in CY2023 year-to-date the stock declined 12 percent.

Due to low public shareholding, Hindustan Zinc is a thinly traded stock with 10 days average volumes closer to 4 lakh. Current shareholding of this company includes 64.92 percent by the promoter group, 29.54 percent by Government, while the rest belongs to mutual funds, insurance companies and retail investors. Analysts expect the dividend payout ratio to change post the Government's stake sale and, hence, greater volatility in its stock price.

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