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Tuesday, November 27, 2012

Hindustan Copper OFS: The Art of Losing 9600 crores of market value to achieve 800 crores of stock sale!


Government is busy celebrating the good start of disinvestment program for 2012-13 with 5.5% stock sale in Hindustan Copper. Hindustan Copper is a marquee firm which is the only completely integrated Copper Producer in India. Copper, incidentally is a very valuable commodity and is the back-bone of all industrial and infrastructure growth world-over. Copper prices in international market often fluctuate with the slightest movement in economic data released by countries like China which are big consumers of this commodity.

Unfortunately, Indian government decided to start the disinvestment by leaving lot of value on table for investors, and decided to do the first issue at 41% discount to the prevailing market price for Hind Copper. Hind Copper was trading at Rs 262 prior to this OFS (Offer for Sale), and OFS was decided at Rs 155 of floor price, which is good 40% discount to market price. Result was very obvious and Hind Copper stock crashed with 20% down-circuit for two days in a row and is trading at 156 today, which is same as OFS price.

At current price, total market cap for Hind Copper is at 14,400 crores, which is a good 9600 crores less than the market cap before the OFS scheme came into being. Thus, the scrip lost 9600 crores of market valuation by this OFS stock sale. Total value of this OFS offer was only about 5.5% of total stock holding or about 800 crores worth of shares were sold in this scheme. So a great example of how to lose 9600 crores to make a paltry 800 crores!

However, what has happened has already happened. Now it’s the time to look forward. Something which was trading at Rs. 262 three days back, is available at 40% discount today. Savvy investors need to relook at financials and see if it makes sense to take a dip at current valuations of Rs 156. Is Hind Copper standing in Deep Value zone right now? Let’s have a look:


Hind Copper has had a good five year track record, with 1471 crores of revenues achieved in year ending 2012. Net profit is at about 323 crores for the year and EPS stands at Rs 3.5 per share. 

If one looks at ownership, retail public owns a paltry 0.3% of total shares, with bulk being in government kitty. Also, most of the OFS stock was bought by LIC, govt banks, with LIC at 350 crores and govt banks at 250 crores of investment. Retail and HNI share was less than 100 crores for this stock.

So retail ownership continues to remain low. This is a key factor which will determine the stock price zooming back to its prior levels, once the price stabilizes in a few months timeframe.

Technical speaking, support is very near at Rs 146, which is all time low. Closest resistance is at 160, 180 and 200 respectively. Between Rs 240 and Rs 280 is a price range where price stayed for more than one year, hence Hind Copper may re-enter this zone in calmer times.


For now, high risk investors can start taking a small dip. This is highly volatile time for this scrip as even today, price is down by more than 8%. However, fortune favors the brave and the stupid! 

Thanks for reading this post and keep writing in to us.

3 comments:

  1. Well, "fortune favors the brave and stupid". But, when things are clear on card, I guess it is the latter who risks. Most of the OFS participants were DII and HNI, they don't sell the scrip immediately. So the stock will be illiquid even now. It had hit LC continuously three days, 20%, 20% and 10%. The bigger consumer is China, in down trend.

    The scrip PE is quite high. Even if we consider three of its copper mines yet to start production, it is costly at current market condition. If markets rally, those fortune retail investors can be saved. If the market, retreats, misfortune hunts those.

    Govt. yet to offload 4% more as part of its target. Govt fixed a fair price of 155/- considering its valuations. If it dares to offload further, the scrip will bleed heavily. There are other quality stocks out there in the current market. Or, other divestment candidates like NTPC, RCF, NALCO, etc... could be good bets.

    Personally I feel, even at 100/- the scrip is costly. We can only see good results after three years.

    ReplyDelete
  2. Thanks for your feedback - "even at 100, the scrip is costly".

    So how does one determine the cost of scrip. Basically, when the firm is a monopoly or a oligopoly, P/E ratio will not work as a value judgement. Pls see that this firm is the only fully integrated copper producer in India. It has several running mines and more in offing.

    Total market cap is 14000 crores today, which is less than $3B. This is very reasonable price for a buyer who wants to acquire several running live copper mines and the oldest running Copper producer in India.

    Beauty lies in the eyes of beholder :)

    ReplyDelete
  3. All those guys discouraging retail investors to stay away from this stock at this price , can you suggest a company of the stature of Hindustan copper available at cheap valuation like this. For the retail investor there is no other time than this to enter into this stock for a clean 15% gain in 1 months time.

    ReplyDelete

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