The right time for Hindustan Copper Ltd’s disinvestment would have been fiscal 2011. Assuming the offer pricing was right, a process made difficult by its low floating stock, the conditions were perfect.
Copper prices had risen from an average of $7,200 a tonne on the London Metal Exchange in the beginning of the year to a high of $10,148 a tonne in February.
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Though it appeared sustainable, many believed it could continue. Marketing the company’s follow-on public offer would have been relatively easier.
But copper has been falling since mid-March and has now reached levels of $8,990 a tonne.
The red metal’s moniker of Dr Copper has been making the rounds again, a reference to its ability to forecast the direction of economic growth. It seems to be portraying a bearish trend, or at least a less bullish trend than it did a few months ago. If the lower economic growth it is predicting comes true, more bad news will follow.
The environment for Hindustan Copper’s follow-on public offer has turned difficult. To make things worse, its March quarter results, released on Saturday, revealed a sharp drop in sales, and an even sharper drop in profits.
Sales were down by around 31% year-on-year (y-o-y), while its operating profit fell by 53%. The company’s operating profit margin fell by around 9 percentage points y-o-y. On a sequential basis, sales fell by 7% and operating profit by around 52%.
This is surprising because copper prices during the March quarter were higher y-o-y, and even over the previous quarter. A drop in output could be a key reason. Government data shows that Hindustan Copper’s ore output rose by 7% y-o-y, indicating nothing untoward on the mining front.
But its production of copper cathode—the metal obtained after processing copper concentrate—fell by 8% during the same period.
A transformer breakdown in the slag cleaning furnace of its copper smelter appears to be the main reason. The drop was especially sharp in February, but corrected in March after the company produced more metal through the tolled route.
Higher proportion of tolled production also meant a higher associated cost, reflected in its other expenditure rising by 55% y-o-y. The combination of lower output and higher cost has hit profitability.
Once its in-house production reverts to normal, costs will normalize. But if copper prices continue falling, the base effect of higher prices may start affecting its performance next.
Hindustan Copper’s results show an increase in inventory, which when sold, could translate to higher sales growth in the June quarter. Its concentrate production capacity will jump four-fold in five years after its expansion projects are completed. Its fiscal 2012 performance, however, will depend on its existing capacity.
The company’s share is down by 19% from its February high of Rs 343 a share. Unless copper reverses its declining trend, Hindustan Copper’s share will likely underperform.
Graphic by Sandeep Bhatnagar/Mint
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