While Hindustan Copper is quoting at a 12-month trailing PE of 306, MMTC is at 761. That’s exorbitant, considering the broader market is quoting at a PE of 20.7.
We are in the middle of a stock market bubble, it would appear from the 12-month trailing price to earnings (PE) ratio of stocks such as Hindustan Copper and MMTC.
PE ratio is calculated by dividing the current market price of a stock by its earnings per share over the last 12 months.
While Hindustan Copper is quoting at a 12-month trailing PE of 306, MMTC is at 761. That’s exorbitant, considering the broader market is quoting at a PE of 20.7.
The reason behind this overpricing is the low levels of free float in the stocks —- proportion of shares available in the market for trading. The government currently holds 99.59% of the shares in Hindustan Copper. So, only 0.41% of the total number of shares is available in the market for trading. Hence the price of this stock has been pushed to an exorbitant level. Similar is the case with MMTC where only 0.67% of the shares are in the public domain.
After the big jump on Tuesday, these stocks took a breather on Wednesday with Hindustan Copper loosing 0.47% to close at Rs 510.95 and MMTC shed 4.10% or Rs 1,412.45 to close at R 33,064.15 on BSE. Both these stocks had risen sharply on Tuesday with Hindustan Copper gaining close to 9%, while MMTC jumped almost 21% on news of board meeting to consider bonus shares, stock split and dividend for FY10.
But now comes the game changer. The prices of these stocks are likely to crash in the days to come to saner levels thanks to the government’s proposed divestment in public sector companies.
The Cabinet Committee on Economic Affairs on June 15, 2010 cleared the divestments of Hindustan Copper along with that of Coal India.
The government will be diluting 10% stake in Hindustan Copper, while another 10% dilution would be through issue of fresh equity shares through a follow on public offering (FPO) expected sometime in September, 2010. The divestment of MMTC is
expected to follow later this fiscal.
Of course, the government cannot expect to issue shares in Hindustan Copper at a PE of 306. The company’s earning per share stands at Rs 1.67. If the stocks are issued at the broader market PE of 20.7, they will be priced at Rs 35. Even at a 50% premium to this price, the stock will be priced at Rs 50.
The same holds true for MMTC. The stock has earnings per share of 44.77. Even at a 50% premium to the current broader market PE of 20.7, the stock should be priced at around Rs 1,400-1,500 and not the atrocious level of Rs 33,000 it is currently at.
Hindustan Copper is the only vertically integrated copper producer in India engaged in a wide spectrum of activities ranging from mining, beneficiation, smelting, refining and manufacturing of continuous cast rods. The company also produces gold, silver, nickel sulphate, selenium, telurium and fertiliser as by-products.
Led by higher copper prices on back of strong global demand last year, the company reported net profit of Rs 154.68 crore in fiscal 2010 compared with a loss of Rs 10.3 crore in FY09. Hindustan Copper owns reserves in Rajasthan, Madhya Pradesh and Jharkhand.
The company also gained from increased demand domestically from automobile, consumer durables and electricity power segments where copper is used extensively. The company. which largely utilises its captive mines for copper concentrate, has to import some part (around 20-30%) to fulfill its requirement. The management intends to use proceeds of the FPO to expand capacity from 3.2 million tones (mt) currently to 11.4 mt over the next 7 years.
Similarly, MMTC, which is the largest importer of gold and silver, has reported better numbers in FY2010. The company posted a net profit of Rs 217.22 crore for FY10, up 55% year on year, while the revenues increased 22% to Rs 45,203.78 crore in FY10. Thus, the stock is trading at a whopping 761 times its EPS of Rs 43.44.
The major factor driving these stocks up abnormally would be controlled once additional free float comes into the market. Investors would be better off waiting for the offerings to hit the market than risk their investments right now. The pricing for the offer would be based on the relative valuation irrespective of market prices as was the case with NMDC earlier.
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