The PSU is making a go of it sitting in a monopoly position and with the blessings of the government it would appear
The numero uno is copper production
is a public sector undertaking (PSU) with its registered office based out of Kolkata. It has an issued and paid up capital of Rs 4.6 bn consisting of 925.2 m equity shares of Rs 5 each. (Interestingly, the paid up capital was reduced in 2006-07 from Rs 9.77 bn to the current capital base). Of this total, 99.59% of the paid up capital is held by the President of India. The Indian public including the employees hold 2.76 m shares or 0.30% of the total. Bodies corporate and insurance companies hold another 0.07% and 0.03% respectively. The share is listed for trading in the BSE-Sensex and NSE-Nifty. The wonder is that SEBI allows this company to be listed for trading with such a miniscule percentage of the outstanding capital being held by non promoters. But in India one can get away with murder if you are an arm of the sarkar.
Mining companies operate under rather peculiar circumstances - and Hindustan Copper is no exception here - inspite of its PSU tag. The land on which the mines are located is owned by the respective state governments, and mining leases for a particular lease period are issued to the mine prospectors by the state governments. At the end of the lease period the lease is then renewed for a further time span. The respective governments collect royalty on the leased lands, and any other pecuniary benefits that may come its way. The company's leased lands cover the four states of Jharkhand, Madhya Pradesh, Rajasthan and Maharashtra.
The company states that there are four major producers of refined copper in India. But it has the distinction of being India's only vertically integrated copper producing company encompassing mining, beneficiation (converting into a paste), smelting, refining and casting of refined copper metal. The company claims that it has access to over two thirds of the copper ore reserves in India. The other copper producers largely depend on imported ore for smelting (converting into metal) and refining (purifying) purposes. In 2012 the country's refined copper capacity is around one million tonnes of copper requiring approximately 100 m tonnes of copper ore. That would make for a humungous ratio of 100:1, but this ratio is based on the assumption of a copper content of 1%. The copper ore production in India in fiscal 2012 was 3.45 m tonnes. Based on the above ratio the total amount of copper produced from indigenous copper ore would have amounted to 34,500 tonnes.
The several by-products
The production of copper also begets small quantities of such valuable by-products as gold and silver. The company also adds that it has rolled out a mine expansion plan to increase production to 12.4 m tonnes by the fiscal 2018. That would imply on paper that the company will be able to produce 1,24,000 tonnes of copper metal. In 2011-12 based on a copper ore production of 3.48 m tonnes the company produced copper to the tune of 31,377 tonnes or a metal production ratio of 110:1. The company has also given some other statistics on the estimated reserves of metal and of resources etc, but it is difficult to get a fix on the point it is trying to make as the figures in print appear garbled. The annual report also lets out that the total recoverable resources position of copper ore in the country stands at 416.8 m tonnes - but scattered. That would amount on paper to a possible production of 4.2 m tonnes of copper.
The company however sells very little of the metal that it produces. The metal is converted into value added copper cathode wire rods (cc wires) - which is the primary item of sale. It also sells the metal in cathode (electrode) form and the balance as metal in concentrate form. In 2011-12 the company sold a total of 31,513 metric tonnes (MT) of its produce against 26,854 MT previously. This comprised in the main the sale of 24,672 MT of CC Rod with the balance comprising of cathode, and metal concentrate.
The ten year financial snapshot
The ten year snapshot picture of the financial performance of the company does not immediately leave much room for comfort. It ponied up its highest revenues in the past decade in 2007-08, followed by the financial year 2006-07. It recorded its third highest revenues in the year under review - 2011-12. The highest gross profit on the other hand was recorded in the latest year 2011-12 followed by the year 2006-07. It recorded a loss in 2002-03 followed by a breakeven situation in 2003-04. The company attributes its financial performance in 2011-12 to a very near high figure of production in more than a decade, higher physical sales of copper and a favourable LME price of copper as compared to the previous year. This logic however does not explain how the company logged in its highest revenues in 2007-08, or how LME prices are of import when sales are affected in the domestic tariff area (DTA) - unless the consumers of copper are also allowed to import copper at will, and affecting domestic copper prices detrimentally in the bargain. The annual report however mentions that the metal price in India is based on the landed price of imported metal. The point is also that the gross domestic sales at Rs 15.71 bn accounted for 96% of all sales that the company affected in 2011-12.
The impression that one gets is that there does not appear to be any sane attempt to present a coherent directors' report to the shareholders. As a matter of fact the report of the board of directors', and the management discussion and analysis report appended to the annual report is about as muddled a compendium of the working of the company and of the industry - as it can get.
Reduction in employee strength
The most encouraging aspect of the company's working - and which has not been highlighted by the company - is the almost steady decline in the employee strength each year over the ten year period. From a high of 7,865 numbers at the end of 2002-03 the employee strength touched a low of 4,810 numbers at the end of 2011-12. That is a drop in strength by 40% almost. This reduction has to be seen in the light of the increase in revenues over the years. The other equally important factor is the almost negligible loan portfolio- inspite of the steady addition to its fixed assets portfolio each year. (As a matter of fact the company boasted humungous cash reserves of Rs 4.5 bn in end 2011-12 against a marginally lower Rs 3.6 bn in the preceding year). In 2011-12 the company spent Rs 12.8 bn in gross block addition against Rs 12.3 bn spent in the preceding year according to the brief snapshot schedule.
Some bizarre figures
However, the spending on gross block has not led to any commensurate increase in the revenues that it has realised. More specifically, the total capex over the ten year period amounted to Rs 108 bn. At least this appears to be the total spending on capex from the data provided in the ten year financial snapshot data sheet. This spending has to be seen in the light of the gross block of Rs 7.9 bn as per the fixed assets schedule at fiscal end 2012. Such a massive mismatch is simply not possible. There must be a gross disclosure error somewhere along the line. The capital spend over ten years as per the snapshot schedule is some 13 times greater than the 2012 fiscal year-end gross block. I may add here that the figures of additions to gross block in the fixed assets schedule for 2010-11 and 2011-12 at Rs 192 m and Rs 214 m respectively is also vastly different and lower than the figures denoted for the two years in the snapshot schedule. Besides this anomaly, the cash flow statement has a totally different take altogether on the capex spend in 2011-12. In this calculation the expenditure is divided between moneys spent on purchase of fixed assets of Rs 200 m, and on 'mining development expenditure' of Rs 1.4 bn. Put simply, this represents a bizarre picture overall.
Anyways the company realised 'gross revenues from operations' of Rs 16.4 bn in 2011-12 up from Rs 12.81 bn previously. Excluding excise duties, and rebates and discounts, the net revenues amounted to Rs 14.8 bn against Rs 11.6 bn previously - up 28%. Other sales related income added up to Rs 81 m against Rs 83 m previously. Then there are a further two classifications of 'other income' under the head non-trade income. 'Dividend' and 'interest income' amounting to Rs 395 m against Rs 257 m previously, and yet other income comprising profit on sale of assets/investments etc, forex gains, and 'others' amounting to Rs 406 m against Rs 216 m previously. Thus in effect other income in toto added up to Rs 882 m against Rs 556 m previously. For the matter of record, 'Other income' constituted 19% of pre-tax profit against 17% previously - which implies this source of revenue is a sizeable constituent in the bottom-line tabulation. Almost 37% of this other income comes from interest on bank deposits, while another 26% comes from 'others'. The point is that such items do not constitute perennial sources of income.
Individually speaking the biggest contributor to revenues is from wire rods. With sales of Rs 12 bn it accounted for 73% of gross revenues. Sales of cathodes (electrodes) brought in another 8% or Rs 1.3 bn. Then there is a separate item called 'Others' which rang in sales of Rs 2.4 bn. This is an amalgam of 10 individual items. But in the main it includes copper concentrate; copper reverts, anode slime, and reverts - all complex technical words. Bringing up the rear separately once again is anode slime (containing gold and silver) accounting for another 4% of sales.
As is the case with all mining companies which convert the ore into a finished product, the cost of raw material inputs as a percentage of all revenue expenditure is miniscule. As a matter of fact, in this specific instance, the cost of material inputs in the preceding year was actually negative as the value of work-in-progress etc. at year end was higher than the cost of raw materials consumed! The biggest item of expenditure by far is an omnibus term called Administration expenses at Rs 5.2 bn against Rs 5.1 bn previously.
In this total 'Other manufacturing expenses' amount to Rs 4.4 bn against Rs 3.9 bn previously - up a mere 2%. The latter item consists of taxes paid to the government in the form of royalties of Rs 606 m and tolling charges of Rs 584 m amounting in all to Rs 1.2 bn against Rs 1.1 bn previously. (Tolling charges refer to taxes paid for the use of infrastructure facilities like roads and bridges). It also includes expenses such as stores consumed, power and water, and contractual jobs etc. The next biggest item of expenditure is employee payouts which inspite of a conscious attempt to pare the numbers is rising inexorably. The total handout on this account at Rs 3.4 bn is higher by 14% over that of the preceding year. Depreciation and amortisation took away another Rs 1.4 bn against Rs 972 m previously - up a hefty 48%. Depleting assets such as mines, and intangible assets too, are amortised and not depreciated - it is only an accounting term no less - no more.
A zero debt undertaking
Importantly enough, finance costs were kept to the bare minimum. The ability to contain the growth in administration costs was the significant reason why pre-tax profit rose 41% to Rs 4.7 bn. The tax provision, inspite of a hefty deduction on account of deferred tax, amounted to 32% of pre-tax profit. But the post tax profit at Rs 3.23 bn compares favourably with the paid up capital of Rs 4.6 bn. The EPS at Rs 3.5 is on a face value of Rs 5 per share. The reserves and surplus stands at Rs 9.3 bn against a paid up capital of Rs 4.6 bn. The reserves include capital reserves of Rs 2.1 bn. The share price oscillated from a high of Rs 325 in April 2011 to a low of Rs 146 in December 2011.
In spite of the several red flags that one can raise, the cash flow statement reveals a picture of a company which is capable of looking after itself - thank you. The company generated cash of Rs 3.4 bn from operations during the year - almost the same as in the preceding year-and the funds generated more than sufficed to take care of the gross block addition, and the mine development expenses in either year. So much so that the company had enough spare cash to plonk down moneys in mutual fund investments to the tune of Rs 837 m. At year end it has 'current' and 'non- current' investments to the tune of Rs 1.5 bn, against a significantly lower R 645 m previously. Interestingly enough the investments under both heads consist of debt instruments issued by public sector undertakings. The balance cash generation was more than sufficient to pay out dividends of Rs 463 m. The end result was a neat accretion in cash resources at the end of the exercise.
Selling cash down
It is also quite apparent that it is able to take the battle to the buyers of its products. For, the trade receivables at year end are a mere 8% of gross sales for the year. This is however higher than the figure of 6% in the preceding year. There was also an attempt to prune the value of inventory holdings at year end. From a figure of 28% of gross sales in the preceding year the holding was reduced to 22%. Further, it also dabbles in judicious gross working capital management. Leaving out the cash bank that it possessed at year end, the gross current liabilities and the gross current assets are almost on par. This would help the company save considerable sums in working capital costs.
If the company is able to maintain this performance level in the years to come then this share is definitely worth taking a look at, especially in the context of the expansion schemes that the company has chalked out, and the fact that as a PSU it will get preferential treatment in the hands of the sarkar. The company adds that globally the price of copper is expected to remain high in the next 3-4 years.
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.