Not a market charmer

Hindustan Copper Ltd (HCL), the only vertically integrated copper player in India having operations across the entire value chain, hit the capital market twice between November 2012 and July 2013. The company raised an aggregate of R1,068 crore, divesting 5.58% equity in the first tranche and 4.01% in the second tranche. But both the offers for sale got a muted market response. LIC and public sector banks had to bail out the offers.

The day before HCL went for the second public offer, Angel Broking asked investors to ?avoid subscribing,? though it said the PSU was poised to fully exploit the country?s copper potential and possessed the first-mover advantage in copper mining. The brokerage said HCL has all its mining complexes near the major copper ore deposits, so it can take up greenfield projects on its existing infrastructure. But the brokerage found the offer offer price of R70 too high.

But chairman and managing director KD Diwan said HCL was on a strong footing in terms of finances, profitability and production. Still, investors were circumspect. In the November 2012 offer, the float was low?0.41%?and the price was set at R120 per share. But it was mostly the public sector banks and financial institutions that picked up the shares. In this month’s offer, private investors picked up just 2% of the offer.

To look back, Hindustan Copper was a sick company under BIFR till FY08. A revival plan entailing a non-cash assistance of R612 crore was approved in FY07 after the company started posting profit. The company was incurring losses from FY96.

Soon after coming out out of the BIFR purview, the company posted a net loss of R10 crore in FY09, but bounced back to profit in FY10 with a net profit of R154.68 crore. The company?s net profit in FY13 was R355.64 crore.

HCL has also accumulated internal resources worth more than R1,500 crore from a negative resource base of R350 crore in FY04 and it is now a zero-debt company. It plans to fund its R2,500-crore expansion through internal accruals. But the aversion of a PSU of such stature to market borrowing is something which is not going well with the investor sentiment, said Ashok Ghosh, a market analyst.

?Denying bank loan means the company is not confident about its internal financial control and is not ready to leverage its balance-sheet,? Ghosh said. Its plan of funding projects from internal accruals only after meeting all balance-sheet commitments raises questions about how effectively the expansion programmes would be implemented, he added.

Diwan said the company?s cash position was strong and so it was not looking to raise any debt to fund its expansion. But the company after three years from now would review the situation and could look for debt via the external commercial borrowing route.

HCL plans to ramp up copper ore production capacity from 3.2 million tonne per annum at present to 12.4 mtpa by FY18 through expansion of its Malanjkhand, Khetri, Kolihan, Surda and Banwas mines. Diwan said the company has started works for four projects, and would float tender for the Kolihan mines next month. The project for Malanjkhand expansion has got environmental clearance and expecting to get wild life clearance in the next two-three months. HCL aims to re-open Rakha and Kendadih mines and develop a new mine, Chapri-Sidheswar mines, which shows that it is poised to fully exploit India?s demand for copper ore, subdued by a large imbalance between smelting and refining capacity.

India’s present smelting and refining capacity stands at 1 mtpa, for which 100 mt of copper ore is required. But the actual copper ore production stands at 3.2 mtpa, entirely produced by HCL. So HCL wants to capitalise on the sustained demand with its average grade copper reserves estimated at 1,034 million tonne, according to joint ore reserve committee estimates.

HCL?s copper reserves are of a higher grade compared to the average global standard. While the average global grades contain 1% copper in 100 tonne of ore HCL grades contain 1.04% to 1.05%. However, Ghosh felt that capital markets have not worked on the basis of these fundamentals and have shied away from investing into such long-term prospects. What worries the market is the volatility in LME copper prices, and the huge impact of the euro zone economy on LME prices.

Former chairman Shakeel Ahmed said the first change HCL brought in was in the sales strategy, which raised its realisations. Earlier, HCL used to supply only to the big players in bulk and gave huge discounts on volume. In the changed strategy, HCL allowed small players to pick up directly and stopped volume-discounts. In fact, the big players, who lifted from HCL and then sold to small players, were earning huge margins.

The other factors that brought HCL to the growth path were its exit from loss-making businesses and rationalisation of manpower, which considerably reduced its expenditure.