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Sunday, Jun 23, 2002

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Hindustan Zinc: Accept

Krishnan Thiagarajan

STERLITE Opportunities and Ventures (SOVL) is making an open offer to acquire a 20 per cent equity stake in Hindustan Zinc at Rs 40.51 per share.

This open offer follows the selection of SOVL as a strategic partner for the sale of the 26 per cent equity stake held by the Government of India in Hindustan Zinc at an acquisition price of Rs 40.51 per share, involving a consideration of Rs 445 crore.

SOVL is making this offer with Sterlite Industries and Sterlite Optical Technologies as persons acting in concert. According to the offer document, Sterlite Industries and Sterlite Optical held a 80.39 per cent and 19.61 per cent stake in SOVL as on the date of public announcement.

Given the depressed fundamentals for zinc and lead, Hindustan Zinc shareholders may use the offer price of Rs 40.51 per share to tender the shares to the open offer by SOVL.

This offer price represents a healthy premium of 47.5 per cent to the book value of Rs 27.46, as of March 31, 2001 and around 60 per cent to the book value of Rs 25.14, as of December 31, 2001. According to the non-promoter shareholding spelt out in the offer document, the Indian public holds only around 3.84 per cent equity stake as of April 12, 2002 while the rest is held by the institutional investors such as FIIs/NRI/OCB/other private corporate bodies.

The potential of Hindustan Zinc under the Sterlite management appears quite strong for three reasons, but may manifest itself only in the long run. First of all, this acquisition is slated to help Sterlite emerge as a dominant player, best positioned to play the "volume game'' in the zinc and lead marketplace.

Secondly, the key research outfits have forecast that aided by a steady improvement in demand from end-user segments and consolidation at the international level, the long term prices of zinc and lead are likely to settle at $1,000-1,100 per tonne (compared to the current price of $ 755) and $570-630 (current price of $435) per tonne respectively over a two-three-year time-frame. Finally, as the domestic supplies continue to fall short of demand, Sterlite may be in a position to expand production capacities of Hindustan Zinc to capitalise on this demand-supply gap in the domestic market.

Though the long term prospects of Hindustan Zinc seem fairly bright under the Sterlite management, the shareholders (particularly Indian public) can use the current offer price as a good exit option and contemplate re-entry into the stock when the depressed price trends for zinc show signs of improvement. At the current levels of $ 755, the prices of zinc are nearly 25-30 per cent lower than the historical long term average of $ 1000-1100 per tonne.

Similar trends were evident in lead prices also. Since the announcement of the offer, the current market price of the stock has shot up to around Rs 38, only marginally lower than the offer price.

In all probability, it may settle at lower levels after this offer closes. The offers opened on May 27, 2002, and is slated to close on June 25. The lead managers to the offer are SBI Capital Markets.

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