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Piramal Enterprises
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Electric Vehicle (EV) has been a popular investment theme for quite a while now. Companies offering tech solutions to EV players, Original Equipment Manufacturers (OEMs) and auto ancillary companies supplying to them amongst others, have been in the limelight.

On this backdrop, the lull in Hindustan Copper appears surprising.

Why has the rally in the red-hot metal stock fizzled out despite copper being one of the key metals for the potential success of the EV story? Is the future growth already in the prices? Let’s find out.

First things first, copper is a dollar-denominated industrial metal of international appeal. Higher copper prices usually denote brighter prospects for the global economy and vice-a-versa.

High liquidity, low interest rates, supply-disruptions and expectations of a speedy global recovery on the back of vaccine rollouts sparked off massive rallies in copper. On top of that, talks of faster EV adoption offered further tailwinds to copper prices.

As you might be aware, EVs consume 3-4 times more copper as compared to Internal Combustion Engine (ICE) vehicles. Moreover, copper is also used in the EV infrastructure.

Here are some copper market stats…

According to S&P Global estimates, refined copper supplies witnessed a huge deficit of 4,79,000 tonnes in 2020 which reduced to 42,000 tonnes this year. Improving supplies are likely to create a surplus situation in the international copper market in 2022.

That said, some market experts have pointed out that the inventory levels of copper at LME (London Metal Exchange) and SHFE (Shanghai Futures Exchange) warehouses have been hovering around their multi-year lows. The scrap flow has been tight too.  Therefore, it remains to be seen how far the surplus situation in the copper market prevails.

Globally, EV and energy transition have been the largest demand drivers in the medium to long term.

Any structural deficit situation might be a positive for copper prices. As against that, a significant surplus might be a negative for the red metal.

What are the demand triggers for copper in India?

  • Potential EV adoption
  • Thrust on domestic electronic manufacturing
  • Ambitious renewable energy targets
  • Government’s push to railway and metro rail projects

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Now let’s take a look at Hindustan Copper…

It is India’s only vertically integrated producer of refined copper and the sole miner of copper ore.

Hindustan Copper has access to 40% of India’s copper reserves. The company has been working on a massive two-phased expansion plan at a tentative capex of Rs 5,500 crore. In phase-1, it’s been ramping up its capacity to 12.2 Million Tonnes Per Annum (MTPA) of copper ore from the existing 3.97 MTPA.  And phase-2 has a target of reaching the mining output of 20.2 MMTPA.

It’s noteworthy that 1 million tonnes of production of refined copper requires 100 million tonnes of copper ore as per Hindustan Copper’s estimates.

In January 2021, the company passed a resolution to issue 13.87 crore shares in one or more tranches through the QIP route—nearly 15% of its paid-up equity capital. Following this, the company raised Rs 500 crore by issuing 4.18 crore shares (of Rs 5 face value) through the QIP route in April 2021, which works out to Rs 119 a share.

Of this, the company has utilized Rs 109 crore as per its disclosure as on November 09, 2021.

Ratings upgrade: a confidence booster?

On October 29, 2021 ICRA upgraded Hindustan Copper’s Long Term rating to “[CRA] AA+/stable” from “[ICRA] AA/stable” and reaffirmed the short term rating of “[ICRA] A1+”.

The independent credit rating agency, ICRA, mentioned that Hindustan Copper is likely to ramp up its ore production capacity by 4X in the next 5 years. This will offer the state-owned miner economies of scale thereby helping it strengthen its position in the domestic market.

Further, the reasons it has cited for the upgrade are also crucial. The agency estimated that Hindustan Copper might generate healthy cash flows in future on the back of firm copper prices, on-going expansion and quality copper mines under its control.

Progress on the disinvestment front…

Hindustan Copper has been one of the top disinvestment candidates through the strategic sales route. According to media reports, the government might hold the minority stake while the majority stake might be given to the incoming private player, along with management control.

Vedanta has already made its intentions clear with its top boss Anil Agarwal hinting at his company participating in any potential bidding process for Hindustan Copper’s stake. On December 07, 2021, Economic Times reported that the decision on Hindustan Copper’s strategic sales might be in a final lap.

Nonetheless, Hindustan Copper has distanced itself from these news reports clarifying that it isn’t aware of any negotiations pertaining to strategic sales. And further India’s largest copper miner said that no price sensitive information is pending to be disclosed to the exchanges.

Can there be any smoke without fire?

You should follow the disinvestment story painstakingly.  You see, Vedanta has ~44% of India’s copper refining capacity while Hindalco owns ~49%. Interestingly, Kumar Mangalam Birla has already made a public statement recently regretting his company losing Hindustan Zinc to Vedanta in 2002.

And please don’t get us wrong. We are not speculating on anything but just stating the facts to set the context right.

Can Hindustan Copper go Hindustan Zinc’s way?

Well, frankly we don’t know. But there’re some interesting facts to know about government selling its stake in Hindustan Zinc to Vedanta back in 2002-03.

When Vedanta bought the government’s 26% stake for Rs 445 crore in the first tranche in 2002, Hindustan Zinc was a loss-making Public Sector Undertaking (PSU). Since then, its journey to become the world’s second largest producer of Zinc and the sixth largest producer of silver has been fascinating.

Although a jump in Zinc prices over the last two decades has been a big enabler, Vedanta’s tight cost controls and production enhancements have made it one of the world’s cheapest Zinc producers.

Based on the company’s market cap of Rs 1,33,942 crore as on December 28, 2021, the government’s residual 29.58% stake in Hindustan Zinc is worth Rs 39, 620 crore at present. That’s been the extent of wealth creation over the last two decades.

Hindustan Copper’s market cap as on December 28, 2021 is Rs 12,034 crore and the government holds a 66.14% stake in the company. And Hindustan Copper is in a much better position today than Hindustan Zinc was in 2002.

By no means are we saying that Hindustan Copper will be a replica of Hindustan Zinc.

We are making a limited point that change of management control can result in a win-win situation for the government and other stakeholders.

In a nutshell

After nearly 8 years of consolidation, Hindustan Copper made a strong upmove in 2021. It appears that it might continue to enjoy the spotlight in 2022 as well, thanks to improving fundamentals and strong tailwinds for the copper sector.

Will it deliver a show-stopping performance? That will largely depend on copper prices, the progress of capacity ramp ups, improvement in profits and the developments on the strategic stake sales front.

Editor’s note: This is perhaps the last blog piece of the year 2021 and hence we thought of expressing our heartfelt gratitude to all our readers. We really hope you find our articles helpful and informative.

Please feel free to share your feedback, if there’s any.

We will bring you more crisp, informative and interesting stories in 2022.

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Wish you very happy, safe and prosperous 2022!

 

You may also like to read: MCX: New products to drive future growth; are you taking note?

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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