FINC/129
IBS Center for Management Research
Dividend Policy at Hindustan Zinc Limited
This case was written by Nagendra Kumar M V and Indu Perepu, IBS Hyderabad. It was compiled from published sources, and
is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.
Sankharaj Roy
Course Name Financial management-II
Course Code INM 531
ICFAI University, Tripura
2017, IBS Center for Management Research. All rights reserved.
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www.icmrindia.org
FINC/129
Dividend Policy at Hindustan Zinc Limited
On March 22, 2017, the management of Hindustan Zinc Limited (HZL)1 announced a special one-
time interim dividend of 1375% equivalent to Rs.27.50 on an equity share of face value Rs. 2. The
announcement of a special dividend resulted in a cash outflow of Rs. 139,850 million, including
the Dividend Distribution Tax (DDT)2.
The golden jubilee dividend paid in the month of April 2016 and the interim dividend paid in the
month of October 2016, took the total dividend paid by HZL during the year to Rs.271,570
million, resulting in the single largest payment of dividend in a financial year by an Indian
company, inclusive of DDT3.
Announcing the special one-time interim dividend, the chairman of Vedanta Group, Agnivesh
Agarwal, said, “We are pleased to reward our shareholders with a special dividend, which reflects
the Company’s confidence in its continued robust performance and demonstrates our commitment
towards delivering value for our shareholders. Since disinvestment by the Government in 2002, the
cumulative dividends paid by the Company, including the current special dividend, is Rs. 375,170
million including dividend distribution tax.”4
Despite becoming the first Indian company to pay such a huge amount as dividend in a financial year,
the share price of HZL surprisingly witnessed a declining trend on the Bombay Stock Exchange5
during March, April, and May 2017 (Refer to Figure-I for Stock Trading Trends of HFL on Bombay
Stock Exchange in from March 2017 to May, 2017. For May the data was up to May 17, 2017)
Figure-I
Stock Trading Trends of HZL on Bombay Stock Exchange in the Months of
March, April, and May 2017
Source: www.moneycontrol.com
1
India-based, HZL a subsidiary of the UK-based Vedanta Resources PLC, is an integrated mining and
resources producer of zinc, lead, silver, and cadmium
2
Gireesh Chandra Prasad, Hindustan Zinc announces special dividend of 1,375% per equity share,
www.livemint.com, March 24, 2017
3
Gireesh Chandra Prasad, Hindustan Zinc announces special dividend of 1,375% per equity share,
www.livemint.com, March 24, 2017
4
Gireesh Chandra Prasad, Hindustan Zinc announces special dividend of 1,375% per equity share,
www.livemint.com, March 24, 2017.
5
A leading stock exchange in India established in the year 1875.
1
Dividend Policy at Hindustan Zinc Limited
DIVIDEND PAYMENT
HZL was incorporated as a Public Sector Undertaking under the Metal Corporation of India
Acquisition Act, 1966, with a majority of stake held by the Government of India (GoI). It was
involved in the business of mining and the production of zinc, lead, silver, and cadmium. Until the
year 2002, the majority stake was in the hands of the GoI. However, after the announcement of the
disinvestment policy by the GoI in the year 2002, the Sterlite Opportunities and Ventures Limited
(SOVL), a subsidiary of Vedanta Limited6, acquired a stake of 26% and management control from
the GoI through an open offer and acquired another 20% stake from the public as per the Securities
Exchange Board of India (SEBI)7 regulations 1997.
SOVL also acquired another 18.92% stake in accordance with the “Call Option” clause in the
shareholders’ agreement between SOVL and the GoI. With the acquisition of additional stake from
the GoI, the total stake of SOVL increased to 64.92% while that of the GoI decreased to 29.54% in
the total share capital of the firm.
SOVL later merged with Sterlite Industries Limited in April 2011, which in turn merged with Sesa
Goa Limited to form Sesa Sterlite Limited in August 2013. Later, in the year 2015, Sesa Sterlite
Limited was renamed as Vedanta Limited. In 2015, HZL became a subsidiary of Vedanta Limited.
HZL was an all-equity firm and no other source of financing was considered by the management.
It relied completely on the retained earnings and reserves and surplus to meet any unforeseen
expenditure. During the year 2011-12, there was a stock split, converting a share of face value Rs.
10 into Rs. 2 face value and an issue of bonus shares in the ratio of 1:1, resulting in 4,225,319,000
outstanding shares, amounting to Rs. 8450.60 million of paid-up capital (Refer to Exhibit-I for
Shareholding Pattern of HZL as on March, 31, 2016). Also, the management of HZL had been
consistently paying dividends (Refer to Exhibit-II for Dividend Payment History of HZL). The
shares of HZL had been trading regularly and their value had increased over the years (Refer to
Table-I Share Trading Trends of HZL and Figure-II for Stock Price Movement of HZL from April
2011 to May 2017).
Table-I
Trading Trends of HZl’s Stock on Bombay Stock Exchange (BSE)
Average Average Average Average Average Average Average No.of
Year Opening High Low Closing Traded Turnover in No.of Trading
Price (Rs.) Price(Rs.) Price(Rs.) Price(Rs.) Quantity million (Rs.) Trades Days
2011-12 130.09 132.02 127.65 129.69 168478.08 1928.35 22.51 249
2012-13 127.17 128.75 125.22 126.69 112004.64 1135.32 14.30 249
2013-14 121.12 123.03 119.05 120.77 149996.54 1955.56 18.41 251
2014-15 161.94 164.30 158.95 161.44 186409.13 4117.60 30.36 243
2015-16 156.30 158.77 153.77 156.18 96269.55 1729.25 15.45 247
2016-17 235.71 239.48 231.97 235.53 208005.51 2700.40 51.63 248
Source: Bombay Stock Exchange, www.bseindia.com, accessed in May, 2017
6
Vedanta Limited is a leading mining company involved in the mining of zinc, lead, silver, oil & gas, iron
ore, copper, aluminum, and commercial power. It was founded in the year 1954 and its headquarters are
located in New Delhi, India.
7
The Securities Exchange Board of India (SEBI) is a statutory body governing and regulating the Indian
Financial Markets. It was established in the year 1992 through the SEBI Act, 1992.
2
Dividend Policy at Hindustan Zinc Limited
Figure-II
Stock Price Movement of HZL (April 01, 2011 to March 31, 2016)
Source: www.moneycontrol.com
BUSINESS PERFORMANCE
The total revenue of HZL increased from Rs. 129,481.40 million in the year 2011-12 to Rs.
169,558.60 million crores in the year 2015-16. Also the net profit after tax increased from Rs.
55260.40 million in the year 2011-12 to Rs.81665.80 million in the year 2015-16. However, in the
year 2015-16, a decline of 3.7% and 0.13% was observed in the total revenues and net profit of the
firm compared to the previous year (Refer to Exhibit-III for Operating Performance of HZL). The
total investments in non-current assets increased from Rs. 98507.80 million in the year 2011-12 to
Rs.181,544.70 million in the year 2015-16, while investments in current assets increased from Rs.
196342.10 million in the year 2011-12 to Rs. 370893.20 million in the year 2015-16 (Refer to
Exhibit-IV for Break-up of HZL’s Non-Current Investments). The majority of investments in current
assets included current investments held for the purpose of trading activities on stock exchanges. The
current investments were made in the purchase and sale of bonds, debentures, and mutual funds.
Zinc, lead, and silver were the three metals in whose mining HZL was actively involved. The
management of HZL was expecting an increase of 2% to 3% per annum in the global demand for
zinc and in the domestic demand by 6% to 7% per annum between 2016 and 2020. Keeping in
view the future demand for zinc, the management had to bring down the costs by closing some
mines and reducing the output costs. Also, the management of HZL had been associated with
international bodies like the International Zinc Association (IZA) for the development of zinc-
based applications like galvanized rebar, galvanized auto car body, zinc in fertilizers, etc., which
were further expected to boost the demand for zinc.
With a growth in the demand for vehicles, e-bikes, telecom towers, and solar power, the demand
for lead was expected to grow by 2% to 3% in the long run. Despite continuing fluctuations in the
commodity market during the year 2015-16, the lead market remained stable with a modest growth
in demand and a stable market price. However, the lead market was witnessing surplus production
since the year 2010, and it was again expected to face a deficit due to under supply of the mined
metal. Over 120 mines involved in the mining of lead were expected to close down their
operations between 2015 and 2035, reducing the lead production by 1.9 million tons. However, the
growth of the telecom industry and the on-going infrastructure development were expected to
increase the demand for industrial batteries, and a medium term industrial growth was expected to
be 5.8% per annum. To meet this demand, the management of HZL believed in making sustainable
investments in the relevant sectors.
The demand for silver was expected to be strong at a growth rate of 3.4% per annum. The supply of
silver had increased by 2.1% in 2015 compared to the previous year. The domestic industrial demand
for silver as an investment option was 4% and the imports of silver had increased by 16% in 2015
compared to the previous year. Though a modest increase in the global demand was observed, a
forecast of a decline in the supply of silver after 2016 was expected to be a cause for concern.
3
Dividend Policy at Hindustan Zinc Limited
HIGHER DIVIDENDS?
Amid strong future business forecasts, a favorable operating and financial position, and regular
payment of dividends, HZL was considered to be a strong company with the potential to pay
higher dividends than it had been paying. According to an analysis done by an investors’ advisory
services organization, Institutional Investors Advisory Services (IiAS), HZL was considered to be
one of the top 73 S&P BSE index companies that had the potential to pay higher dividends than it
was paying. To conduct the analysis, IiAS considered companies with a profitability of above
Rs.500 million and a positive cash flow from operations. The positive operational cash flows were
calculated by deducting 75% of the average of three years’ capital expenditure and deducting the
equity and preference dividends paid during the fiscal year 2015. Further, to ignore the impact of
financial leverage on the payment of dividend, as higher leverage would impact the earnings, cash
flow, and dividend payout, IiAS ignored companies with a debt/equity ratio of more than 1X and a
debt/EBITDA ratio of more than 2.5X.
For the purpose of calculating cash and cash equivalents, IiAS clubbed together both non-current
investments (which included investments in bank deposits, bank certificates, mutual funds, and
equity shares) with cash and cash equivalents and deducted the contingent liabilities to arrive at a
positive figure of cash and cash equivalents.
To arrive at companies having excess cash available for the payment of dividend, IiAS considered
companies whose cash and cash equivalents and positive net cash flows were the lowest. It also
eliminated companies whose profitability was less than 50% in the first three quarters of the
financial year 2015 compared to profits during the earlier financial year. All the companies which
were paying a dividend of Re.1 per share or lower did not find a place in the IiAS dividend
payment analysis for the year 2015-16.
Based on the conditions specified here, IiAS sorted out around 73 companies that had the potential
to pay a higher dividend in the year 2015-16 compared with the earlier financial year and HZL was
one of the those top 73 companies (Refer to Table-II for Estimates of Parameters by IiAS for HZL).
In line with the assessment and analysis of IiAS, the management of HZL announced and paid a
dividend of 1390% on the face value of Rs.2, equivalent to Rs.27.8 dividend per share.
After the payment of dividend in 2017, the balance in Reserves and Surpluses, and in Cash and
Cash equivalents declined significantly (Refer to Exhibit-V for Trends in Reserves and Surpluses
and Cash and Cash Equivalents). And to the surprise of the company and the investors, after the
payment of record dividends, the share price showed a considerable decline.
Table-II
Estimates of Parameters by IiAS for HZL
Estimate
Parameter
(Rs. In million)
PAT > = 500 81,780
CFO > 0 55,307
CFO - 75% (Average Capex) - FY15 total dividend - FY15 preference dividend > 0 20,316
Debt/ Networth <=1
Debt/ PBITDA <= 2.5
Cash & cash equivalents - Contingent liabilities > 0 264733
Excess cash available > 0 16,930
TTM increase >50% 24%
Incremental dividend per share 4.0
Source: Institutional EYE, 73 Companies can pay over Rs.200 billion more in Dividends, www.moneycontrol.com,
January 19, 2016
4
Dividend Policy at Hindustan Zinc Limited
Exhibit-I
Shareholding Pattern of HZL as on March, 31, 2016
Category of Shareholder No. of Shares % of Shares
Promoters: Indian Promoters Sterlite Opportunities and
27,43,154,310 64.9218
Ventures Limited
Mutual Funds/UTI 56,986,737 1.3487
Financial Institutions/Banks/Insurance Companies
(Central/State Government Institutions/Non-Government 25,440,370 0.6021
Institutions)
Foreign Institutional Investors 62,430,358 1.4775
Private Corporate Bodies 39,186,975 0.9274
Indian Public 46,974,109 1.1117
NRI/OCB’s 17,33,338 0.0410
NRI Company 140,000 0.0033
Bank Foreign 10,000 0.0002
Foreign National Individual 2,750 0.0001
Any other 1,309,463 0.0310
GOI-President of India 12,47,950,590 29.5351
Total 42,25,319,000 100.0000
Source: Annual Reports of HZL
Exhibit-II
Dividend Payment History of HZL
Financial Announcement Effective Dividend Dividend
Total Dividend
Year Date Date Type (%)
22-03-17 29-03-17 Special 1,375.00
2016-17 24-10-16 04-11-16 Interim 95.00 2670% (Rs.53.4)
23-03-16 06-04-16 Special 1,200.00
09-10-15 23-10-15 Interim 95.00
2015-16 190% (Rs.3.8)
19-10-15 23-10-15 Special 95.00
20-04-15 12-05-15 Final 125.00
2014-15 220% (Rs.4.4)
05-09-14 22-09-14 Interim 95.00
21-04-14 19-05-14 Final 95.00
2013-14 175% (Rs.3.5)
14-10-13 28-10-13 Interim 80.00
25-04-13 09-05-13 Final 75.00
2012-13 155% (Rs.3.1)
12-10-12 23-10-12 Interim 80.00
19-04-12 28-06-12 Final 45.00
2011-12 120% (Rs.2.4)
17-10-11 25-10-11 Interim 75.00
Source: Annual Reports of HZL
5
Dividend Policy at Hindustan Zinc Limited
Exhibit-III
Operating Performance of HZL (2011-2016)
(Amount in million Rs.)
Particulars 2011-12 2012-13 2013-14 2014-15 2015-16
Total Revenue 12,9481.40 147319.90 155354.30 176094.40 169558.60
Total Expenses 59604.70 68943.40 75657.20 80094.50 83153.70
Earnings Before Tax 69445.40 78201.20 79697.10 95701.20 86103.80
Tax 1,4185.00 9206.40 1,0650.90 13921.20 4438.00
Earnings After Tax 55260.40 68994.80 69046.20 81780.00 81665.80
Source: Annual Reports of HZL
Exhibit-IV
Break-up of HZL’s Non-Current Investments (2011-2016)
(Amount in million Rs.)
Particulars 2011-12 2012-13 2013-14 2014-15 2015-16
FIXED ASSETS
Tangible Assets 84657.20 84736.90 90234.30 93290.50 98212.70
Intangible Assets 471.00 100.50 1238.20 1171.20 1200.60
Capital WIP* 4449.60 10818.50 15409.40 20047.10 23628.40
Total Net Fixed Assets 89577.90 95655.90 106881.90 114508.80 123041.70
Non-Current Investments 25.90 27.00 28.10 - -
Long-term Loans and Advances 8758.00 18982.40 29393.60 43373.20 58503.00
Other Non-Current Assets 146.10 2391.90 - - -
Source: Annual Reports of HZL, *WIP-Work in Progress
Exhibit-V
Trends in Reserves and Surpluses and Cash and Cash Equivalents (2011-16)
Source: Compiled from Hindustan Zinc Limited Annual Reports (2011-2016)
6
Dividend Policy at Hindustan Zinc Limited
Suggested Readings and References:
1. Hindustan Zinc Limited Annual Reports (2011-2016), www.hzlindia.com, May 2017
2. Gireesh Chandra Prasad, “Hindustan Zinc announces special dividend of 1,375% per
equity share”, www.livemint.com, March 24, 2017.
3. Institutional EYE, “73 Companies can pay over Rs.200 billion more in Dividends”,
www.moneycontrol.com, January 19, 2016
4. www.moneycontrol.com
5. www.bseindia.com
6. www.nseindia.com
7. www.hzlindia.com
