Hindustan Copper: FPO Pricing at steep discount?

After blue-chip PSU IPOs of Coal India, Power Grid and the soon-expected Manganese Ore, Hindustan Copper‘s Follow-on Public Offer (FPO) is likely to be made in December 2010.

Hindustan Copper‘s FPO will involve 18.39 crore shares of Rs 5 each. Of this the Government will make an offer for sale of 9.2 crore shares and the rest will be a fresh issue. The FPO will constitute 18.08% of the post-issue paid-up equity capital of Hindustan Copper. The issue will raise between Rs. 4,000 to 5,000 crores.

As is the norm with PSU IPOs & FPOs, retail investors will be offered shares at a discount of 5% of the final offer price.

Hindustan Copper‘s reserves and resources of copper ore are about 623 million tonne. Of this, the proven resources are 411 million tonnes. Given Hindustan Copper‘s current production of 3 to 3.2 million tonnes of copper ore per annum Hindustan Copper has reserves that will last it over several decades.

Hindustan Copper is also comfortably placed with regard to the grade of copper ore. As against the global average of 0.82, Hindustan Copper‘s average is 1.05. The grade of the ore is determined as per the metal content. A grade of 1.05% of copper metal as compared to 0.8% to global average is considered very good quality. To take advantage of this Hindustan Copper is planning to multiple its extracting capacity in the next six years from about 32,000 tonne per annum of metal content to more than 1.2 lakh tonne of copper content by March 2017.

Hindustan Copper estimates that the production numbers will increase in the later years. It is expected that in 2013 Hindustan Copper will be at 4.7 million of copper ore. After that it will increase to 7.4 next year and so on.

Hindustan Copper also expects to raise around Rs 3,000 crore by selling by-products from its mines at Malanjkhand in Madhya Pradesh and Khetri in Rajasthan. Hindustan Copper has floated tenders for selling about 200 million tonnes of high-quality granites (also called waste rock) at its MP mines and 95 million tonnes of copper tailing from its mines in MP and Rajasthan. The money that will accrue to Hindustan Copper by selling the by-products will come over the next few years since it is not possible to lift the granites and copper tailings at one go. It is expected that Hindustan Copper may get at least Rs 915 crores in 10 years from waste granite and about Rs 2,000 crores from copper tailings.

Hindustan Copper posted decent results for Q2 FY 2011. The net profit was Rs 56.21 crores for the quarter ended September 30, 2010 as compared to Rs 15.10 crores for the quarter ended September 30, 2009. Hindustan Copper‘s total Income increased from Rs 247 crores for the quarter ended September 30, 2009 to Rs 324 crores for the quarter ended September 30, 2010. The EPS increased from 0.16 to Rs. 0.61. The half year EPS was Rs. 0.89 as compared to Rs. 0.17. Hindustan Copper has cash & bank balances of over Rs. 320 crores as of 30th September 2010.

On the pricing front, Hindustan Copper is trading in the range of Rs. 400 to Rs. 450. There is hardly any liquidity because almost 99.5% in Hindustan Copper, with just about 0.5% with the public. It is expected that the price for the FPO will be very competitive and at a steep discount to the market price of upto 30 – 40%. Unconfirmed reports say that the price of Hindustan Copper will be in the range of Rs. 200 to Rs. 300 per share.

At any rate, given Hindustan Copper‘s strong financial credentials, revenue visibility and growth prospects, investors have not much to be anxious about investing in this blue-chip PSU FPO.