The government’s plan of selling a partial stake in Hindustan Copper Ltd was well-publicized; so Thursday’s reaction to the formal announcement was a bit puzzling. On Wednesday, the firm announced that the government, which owns a 99.6% stake, will sell an equity stake ranging from 4% to 9.6%. Money will finally flow into the government’s disinvestment kitty, and depending on the actual stake sale, also help the company attain the 10% listing threshold.
On Thursday, Hindustan Copper’s shares fell at first, declining by 7% at its lowest level over the previous day’s close, but then recovered and ended the day with a gain of 11.3%. Neither reaction holds much significance, considering its low floating stock. In fact, if the government had used the market price as a benchmark, the issue may have failed. It announced a floor price of Rs.155 on Thursday evening, dealing a blow to those who bought the stock on Thursday, but it is a sensible decision.
At its current price of Rs.266 a share, Hindustan Copper trades at 76 times its 2011-12 earnings per share (EPS), and if you take its trailing four-quarter EPS, it works out to 80 times. That is expensive by any standard. And, neither the industry scenario nor the company’s own performance supports these valuations.
A slowing world economy and China’s dulled appetite for metals has affected copper prices. Current prices are down by 6.5% from the start of the quarter, and have been very volatile in 2012. Hindustan Copper’s first half results saw revenue rise by 10.8% to Rs.596.4 crore, while its net profit declined by 13%.
Hindustan Copper has been facing production constraints that are affecting performance, apart from weak copper prices. In April-September 2012, government data shows the company’s own copper cathode output declined by 13% year-on-year, while tolled output rose by 19.6%. In its 2011-12 annual report, it had blamed equipment breakdown and a shutdown of its Khetri mines for the decline in output. While it had started taking corrective action, that is yet to show results.
The company is aiming to become a more significant player, with a five-year capital investment plan of Rs.3,402 crore, which will see its capacity rise from 3.5 million tonnes (mt) in 2012-13 to 12.4 mt in 2016-17. But this plan is at least a few years away from making a significant impact, and is also contingent on proper execution. In the mining sector, given the controversies that crop up repeatedly, timely implementation could be a problem. On the brighter side, the company is debt-free, which will be useful if it has to raise debt to fund its expansion plans.
Hindustan Copper’s near-to-medium term share valuations are linked to its existing operations. If it can resolve the bottlenecks that are affecting its own copper output, that could be a key positive trigger, as could a recovery in copper prices. The visibility on either of these factors is low. The government’s decision to set Rs.155 as a floor price is sensible. Even at that price, it trades at 47 times its trailing four-quarter EPS. That is still expensive for a commodity company, but it does give the government a better shot at succeeding in lowering its stake.