Issue Highlights:

• Metal Scrap Trade Corporation Limited (MSTC) is a Public Sector Undertaking incorporated on 9^th September 1964 with headquarters in Kolkata, India. MSTC comes under category-I Mini Ratna owned and operated by Government of India. The company started as a regulatory body to export ferrous scrap. MSTC became a subsidiary of Steel Authority of India (SAIL) in the year 1974. Later, in the year 1982-1983 MSTC was converted into an independent company of Government of India under the administrative control of Ministry of Steel. Until 1992 MSTC was a canalizing agency for import of ferrous scrap.

• The company works under 3 business segments 1. E-commerce. 2. Trading. 3. Recycling
• MSTC Ltd. Diversified into one of the leading e-commerce service providers in India and also one of the major players in trading of bulk-raw material. MSTC is a pioneer in E-commerce segment providing services to government and government controlled entities. It is one of the key players to offer a comprehensive range of services in their e-procurement segment.
• The company entered into a joint venture with Mahindra Intertrade Limited (MIL) in 2016 at a ratio of 50:50 with an objective to set up shredding plant and collection centers across known as CERO or MMRPL.
• Even though company generates 80% of its revenue from its trading segment but the contribution of E-commerce in their bottom segment is increasing.
• Under E-commerce segment the company provides e-auction/e-sale and e-procurement services and also provides customized software solutions. Under e-auction, they have conducted 190,000 auctions and have 110,000 subscribers. It has emerged as a preferred service provider for various government and government-controlled entities. MSTC is engaged in import as well as domestic sourcing of bulk industrial raw materials.

Financial Highlights:

 

 

Revenue Vertical:

 

Share Holding Pattern:

 

Comparison of Profit and Tax paid: (Rs. In crores)

Financials Summary:

• The revenue from FY 16 to FY18 had contracted from more than 10% due to the slowdown in their trading business. It was due to bad debt from their cash and carry model that tampered their trading segment revenue.
• However, Revenue from E-commerce segment reported a growth of 26% from FY 16 to FY17. From FY17 to FY18 the e-commerce segment increased by 17% YoY. Due to the increase in traction in that segment.
• MSTC has been suffering losses due to the higher taxes expenses. They have been paying higher taxes even though; they have been reporting lower profits or losses. Taxes paid as on H1FY19 stood at Rs 26.3 crores and in FY 18 it stood at Rs. 39.449 crores as compared to Rs. 43.6 crores in FY 17. In FY16 the tax expenses stood at Rs. 52.7crores.
• The gratuity norms changed and the company had to pay Rs. 25 crores as a gratuity to its employees in FY18.
• Despite holding a dominant position, the company fails to maintain its top line numbers. In FY17 the company witnessed a sharp decline in terms of (decline of 43%) from Rs. 3307.8 in FY16 to Rs. 2In FY 17. It was due to their cash and carry model prone to higher credit risk which led to bad debts in the business.
• The management has indicated that they have fully provisioned the loss incurred to them from Cash and Carry mode since 2011.

 

Key Strengths:

• MSTC is one of the largest e-commerce service providers in India that generates around 65%of company’s revenue. E-auction business has provided by the company is around 190,000 auctions till H1FY19.
• It is the first company to conduct e-auction of coal for coal India limited in 2004.
• It has secure and advance technology platform with all the required IT certifications.
• MMRPL has been set up in Noida Delhi where the ELV and white goods and bifurcated from ferrous and non-ferrous substance and the scrap is converted into shredded scrap which is key raw material of secondary steel plant. MSTC is the first authorized recycling company in India.
• MSTC has an active client base that consists of government and government-controlled entities.
• The company has the ability to convert any physical method of business to a virtual or online market place.
• MSTC promotes Governments Digital India platforms and they are in the forefront in implementing various initiatives taken by the GOI on digitalization.
• The company has been developing a portal of export and import various petroleum products i.e. by-products of for oil marketing companies. Export portal is tested and online. LNG and other products will be traded by their platforms only. E-auction and e-procurement on an average has a growth CAGR of 46%.

Key Risks:

• The trading segment of the business consists of cash and carry, which had been prone to various risks which in turn has lead to bad debts and mute profit generations
• Due to the slump in steel sector, the trade receivables of the company have been affected as the company has major exposure in this sector. This has also led to volatility in their trade volumes.
• Also in the past, there was a decrease in the tirade n thermal sector due to changes in the policies.
• The company has incurred a loss in their preceding financial statements due to the bad debts written off. The loss recorded in H1FY19, FY18, FY17 and FY16 was Rs. 15.884 crores, Rs. 6.481 crores and Rs. 2, 47.1 crores respectively.
• The company has been making losses due to the provisions made for the bad debts from cash and carry models from their trading segment.
• Slow down in the economy will affect their business.

MSTC has 3 business verticals:

1. E-commerce
2. Trading
3. Recycling via MMRPL.

E-commerce:

MSTC is a pioneer PSU entity in providing e-auction, e-procurement services and development of customized software solutions. It caters to the government and government-controlled entities by rendering services of e-auction and one of the major players in providing e-procurement services. Further, under this segment, the company undertakes disposal of ferrous and non-ferrous scrap, condemned plants, minerals, agri and forest produce, and surplus undertaking. MSTC has conducted 190,000 auctions and has served 110,000 users.

Trading:

MSTC’s trading segment is engaged in import and along with this sourcing of bulk industrial raw material for traders and well as other users. This segment of business looks after the purchase/sale of crude oil, coking oil, steam coal, line pipes, metallurgical coke, HR oil, naphtha, low ash etc on behalf of the customers.  The trading business consists of 3 segments. Cash and carry model, 100% bank guarantees backed procurement and Associated supply model.

Recycling:

The company entered into 50:50 joint ventures with Mahindra Intertrade Limited (MIL) in the year 2016. The JV Was for the purpose of expanding the company’s spectrum of operation and to support the Steel industry of India. MMRPL is in place to set up a state of art auto shredding plant in the country.  They will be recycling the End-of-Life Vehicles (ELV’s) and other white goods. The company converts these goods into shredded scrap metal which in turn is very important raw material for steel plants.

Network of Offices:

MSTC has its headquarters in Kolkata with four regional offices located in Delhi, Mumbai, Kolkata and Chennai. Along with this, the company has 13 branch offices in the major cities across India and 3 regional site offices. With this, the company has a wide footprint across the country.

Man Power:

MSTC has experience and qualified management. Also they have qualified employees working for them. The Chairman and Managing Director have more than 37 years of experience in the field of business development, commercials, operations and management. This has led to the company’s growth. MSTC was awarded as “Kolkata Best Employer Brand awards 2017.”

MSTC Business Model:

 

Object of the Issue

• To carry out disinvestment method by the government way of selling17,670,400 equity shares of the company that consist of 25.10 percent.
• To gain the benefits of getting listing the company’s equity shares on the stock exchange

The company won’t be receiving any proceeds of the offer. All the proceeds will be given to the shareholder selling its stake in the company

Promoter and Key Management:

MSTC was incorporated to deal in ferrous scrap export. It was a subsidiary of SAIL till 1982. The company used to be a canalizing agency for import of steel scrap they were also canalizing agents for old ships and scrap and dismantling. Later, after de-canalizing in the year 1982, it became an independent company under the Ministry of Steel. First, the company was awarded by Mini Ratna II status in the year 2001. In 2002 the company commenced their e-commerce site. In the year 2004 MSTC commenced its first auction of Coal India, it was first such event that happened. In 2006 The Company was awarded as category I Mini Ratna.

Bam Bahadur Singh:

He is the Chairman and Managing Director of MSTC. He holds a degree of Bachelors of Science (Engineering) from the University of Ranchi. He has more than 37 years of expert experience in business development, operational, management and commercial. Prior to joining the company, he was associated with Coal India, Shriram Bearing Limited and Bharat Earthmovers.

Subrata Sarkar

He is the Chief Financial Officer (CFO) and Director (Finance) in MSTC. He holds a bachelor degree of Science. He has about 20 years of experience in Finance and accounts. Earlier, He was associated with Sarkar Mitra&Mitra Chartered Account partner. He has been in MSTC since May 2001.

Bhanu Kumar:

She is the Whole Time Director of the company holding 29 years of experience in the field of operational and commercial departments. She has been associated with MSTC since 1989.

RuchikaChaudryGovil:

She is a Government of India nominee Director of MSTC. She holds a degree of Masters of Arts and Economics and Bachelors degree in Law from Delhi. She has 28 years of experience in revenue and Income tax situations. She is cadre of Indian Revenue Services and income tax matter.

Promodita:

She is a Government of India nominee Director of MSTC. She holds Doctor of Philosophy from Jawaharlal Nehru University. He has over 22 years of experience in assisting the government in policy making and also evaluating the policies from time to time as desired by the Government.

GangaramAloria:

He is a Non-official Independent Director of MSTC. He has more than 35 years of experience in public services and administration. Prior to being the Director of the company, he served as an Additional Chief Secretary to Government of Gujarat, Urban Development & Urban Housing Department, Sachivalya, Gandhinagar. He was later appointed as the Chief Secretary to the Government of Gujarat, Sachivalya, and Gandhinagar w.e.f 31^st May 2015.

MuraliVallabhan, RudramauniShivayogeppaYeli, PravatiParida and AparnaChaturvedi are the Non-official Independent Directors along with GangaramAloria in MSTC.

 

 

 

 

 

Future outlook:

• The company is aggressively trying to entail private business as their customers as there are limited government controlled entities
• The company aims to diversify their spread in agriculture sector and bring them on online platforms.
• The company aims to capture the untapped markets.
• The company aims to expand more into Agro business.
• MSTC aims to grow in E-commerce segment at a CAGR of 40% YoY.

Sector Overview:

Major Business to Business model in e-commerce business.  image

Pure Market place model:

It is a platform that provides that provides a platform for buyers and sellers to connect and facilitates the exchange of goods and services between both. When the customer purchases a product, he should buy from a registered seller on e-commerce platforms. It is a platform where customers to interact with the seller.

Pros:

The products that a seller is selling can be visible online this can improve the business. There will be buyers accross.which in turn will help both buyers and sellers.

Managed Market place model:

The key market players under this model are MSTC Limited, Steelez portal, Steel exchange. in, M3  portal, and M-Junction and others. Instead of a physical marketing, online platforms based marketing on this model works on better parameters. This  model has minimum criteria or barriers for both buyers and sellers. Although, There are counterparty involved on both the parties i.e. buyers and sellers.

Pros:

This e-commerce model helps to increase the customer base for a company as well as generate volumes of trade. There are large numbers of sellers available in this model where MSTC provides various options to them to customize and sell them accordingly.

Inventory led training model: benefits

Under this model the companies stocks and sources the products at the instruction of the buyers. The companies enter into these arrangements back to back so as to minimize the price risk inherited in this model. The buyers gain from such models as it reduces the requirements of warehousing and other quality requirements from their end. Earlier, these models used to deliver higher margins but it has been plagued by counterparty defaults and prolonged litigations. This has led to curtail of the credit facilities that were earlier provided to the buyers.

Benefits:

This type of a model is beneficial to maintain trust and provide better facilities to the customers. The quality of the products can be in check via this platform. The delivery of the products can be speedy. Although this model restricts the liquidity in the business due to higher credit risk.

MSTC has emerged as one of the leading players in this segment.

E-Auction or Auction model:

It is a process of selling goods or services by putting up for bid, taking bidding bids where the highest bidder wins the auction. Earlier, Auctions were limited to only special items, large lots of excess merchandise or confiscated goods and it used to be conducted in physical form. However, in recent time the auctioning process has evolved and this process has taken place on the internet with the help of advanced technology. Now, government, along with large business is embracing this service.

MSTC has emerged as a pioneer in this segment catering to both government as well as private sector. Other competitors in this segment are M-junction, Dot Com Pvt Ltd, e-procurement Technology Ltd, CI India Pvt Ltd, Government e-Auction, MatexNet Pvt. Ltd.

Pros:

The e-auction model saves a whole raft of cost along with that it provides benefits like reaching to a global audience online, having more effective more marketing strategy and reduction in maintaining stock levels and storage.

Procurement Service model or e-Procurement:

Key players  operating under this model include MSTC, M-Junctions, BuyJunction portal, e-Procurement technology Ltd. e-procurement or procurement over web/specialized software  refers to a procurement route used by the companies to purchase ranging raw material, input material, and to repair/ replace components.

Pros:

This model helps in maintaining the transparency and eliminates paper work. Further it promotes standardized buying and reduction in costs.

Cash Flow Statement:  (Rs. In crores) 

Financial performance:

• During FY16 MSTC has posted a turnover of Rs.3307.8 crores/ Net loss of Rs (247.1)crores. In FY17 the company reported a turnover of Rs. 1876.2 crores/Net profit stood at Rs.139.15 crores. In H1FY19, the company posted net revenue of Rs. 2793.15 crores/Net loss of Rs.6.481 crores due to increase in employee cost in FY18. In H1FY19 the turnover reported stood at Rs. 1491.55 crores/net loss was Rs. 15.88 crores. Since 2011-2013 there was slump in the steel sector and decline in the sale of the thermal coal this led to a decline in the volumes in their trade. Also the company has higher credit risk in Cash and carry model. Bad debts written off by the company stood at Rs. 484 crores. Due to this, the bottom line has shown negative trends in FY18 and H1FY19.
• For the last 3 fiscals, the company has posted an average EPS of Rs. -16.8 per share.
• The company is placed at -56.63 x in terms of P/E ratio.
• The provisions made by MSTC for its doubtful debt arising from its cash and carry model conducted from FY11 to FY13 are accounted in FY16, FY17, FY18 and H1FY19 to Rs. 358 crores, Rs. 31 crores, Rs. 222.50 crore, and Rs 128.6crores respectively. From FY16 to FY18 and H1FY19 the company has made provisions for doubtful debt of around Rs. 740 crores. This has affected the bottom line of the business. MSTC has transferred from cash and carry model to 110% bank guarantee backed procurement from FY14.
• The total debt owned by the company was Rs. 302 crores and total cash and cash equivalent was Rs.554 crores in H1FY19.
• They pay dividend at regular intervals, the average dividend per share in the last 3 fiscal was at Rs. 3.7.
• Dividend paid per share in H1FY19 was Rs. 7.4, FY18: Rs. 7.1 in FY17 Rs. 10.25, FY 16- Rs. 20.7.

Investment Rationale:

• The weighted average Return on Net Worth for the last 3 fiscals is -2.55% on the basis of financial statements.
• The basic EPS for the last 3 fiscals is negative. H1FY19 EPS was Rs -2.26. FY 18 -Rs -35.10 FY 17-Rs. 19.77 FY16- Rs. -0.92.
• Due to the company’s niche business, they don’t have any listed peers in the same line of business.
• The NAV for H1FY19 stood at Rs.46.58 and in FY18 it was at Rs. 52.01.
• Since EPS is negative after dilution is at Rs -2.26 the company is valued at 0.08x P/s with NAV at Rs. 46.58 in H1FY19.
• PEG Ratio for H1FY19 is placed at -186.92x.
• As per H1FY19 the company’s EV/EBITDA accounted to 8.08x and price to book value is 2.26x, it is stable provided in future the company reports normalized profits.

 

Equity Right View-

Metal Scrap Trade Corporation looks like a good long term bet but we believe in the primary market this IPO is slightly expensive for our comfort. The last 3 PSU IPOs also have not performed well. We believe, the investors will get a better entry point in the secondary markets. In financial performance company also need to show the turnaround in numbers in the next 2 quarters. Investors can AVOID this IPO of MSTC.

 

Avoid  

Metal Scrap Trade Corporation Limited analysis is provided by Equity Right and Equity Right Research Team.

For more details about MSTC, offer details, financial performance and valuations feel free to contact our research team at contact@equityright.com.

Equity Right Research provides IPO recommendations in 3 tiers i.e. subscribe, avoid or neutral.

 

Research Team –

Sr. Research Analyst – Mr Parag Shah. parags@equityright.com Research Associate- Ms Varsha K

varshak@equityright.com

Editor: Faiz Zapdekar. faiz@equityright.com

 

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Metal Scrap Trade Corporation Limited