Hindustan Zinc: Re-rating likely on rising dividend payout

Analysts are bullish because of volume ramp-up, strong price outlook and improving return ratios

Hindustan Zinc's (HZL's) announcement of a dividend of Rs 27.50 a share was cheered by the Street, with its stock price up 2.7 per cent to close at Rs 320.20 on Thursday.

The Street had expected a dividend of up to Rs 20. With a year-to-date one of Rs 29.45 a share, the dividend yield now comes to more than nine per cent, and the payout is higher than the Rs 27.8 a share in FY16. This has further bolstered the Street's confidence, as well as expectations, from HZL.

The company has distributed about 55 per cent of the cash on its books by announcing about Rs 14,000 crore of payout on Wednesday evening. Analysts remain positive on this trend and are not concerned at the cash reduction in its books. This is because the company has strong cash flows, which analysts estimate to be close to Rs 10,000 crore a year in FY18 and in FY19. The continuous ramp-up in volumes and a strong zinc price outlook are key reasons for the expectation.

The improving dividend payouts could also lead to re-rating of the stock, believe some. Deutsche Bank says its FY18 estimated return on equity (RoE) could rise by 700 basis points to 33 per cent after factoring in the latest payout. RoE is a key parameter that markets consider while valuing a stock. This, with expectation of good payout in future, should support a continued re-rating of the stock, their analysts add. Analysts at Edelweiss are also positive. After adjusting for the payout, they arrive at an ex-dividend target price of Rs 335 for the stock.