Back Office Login

you are here: Equity | IPO | New Issue Details
As on: May 19, 2019 04:14 PM
Tuesday, March 12, 2019 Click here for Rating Reckoner
MSTC
Maximum volatility
CM RATING30/100
Incorporated in 1964 by the President of India, MSTC (the erstwhile Metal Scrape Trading Co.) is a Mini Ratna Public Sector Undertaking (PSU) company. From an earlier business as a pure trading company, the company has grown into a large diversified, multi-product services and trading company. Currently, the three main business verticals in the company are, (i) E-commerce, (ii) Trading, and (iii) Recycling.

Ferro Scrap Nigam (FSN) is a 100% subsidiary of MSTC and is in the business of processing of steel mills slag and other refuse and debris for the recovery of iron and steel scrap and other metallics and to render all kinds of service to manufacturer of steel and iron and other metallics. MSTC entered into a 50: 50 joint venture agreement dated August 8, 2016, with Mahindra Intertrade to form Mahindra MSTC Recycling Pvt Ltd (MMRPL). MMRPL is poised to set up one of the organized state of the art auto shredding plant in India for recycling ELVs (End of Life Vehicles) and other white goods by converting these into shredded scrap which is a vital raw material for steel plants.

MSTC was a canalising agency for import of ferrous scrap until 1992. After de-canalisation the company has established itself as one of the leading e-commerce service providers in the country. The company is one of the leading PSU entity engaged in providing e-commerce related services across diversified industry segment offering e-auction/e-sale, e-procurement services and development of customized software/solutions. They have emerged as a pioneer in the e-auction segment catering to the government sector, partnering with different government agencies and ministries in conducting e-auctions. The company is also one of the key players offering comprehensive range of services in e-procurement segment.

MSTC's strength lies in its ability to convert any business activity conducted through brick and mortar method and/or in any other method to online activity. The company has a proven track record of providing e-commerce platform for various types of products across diverse industries. MSTC have conducted e-auction of variety of materials such as coal, minerals, scrap and most recently items such as onion, litchi, black pepper, pineapple, hill-grass in agri products, tendu leaves, timber, sal seed in forest products, human hair, fly-ash etc. The company has also undertaken the e-auction of land parcels, apartment banks' NPAs and also assets under DRT etc. The first ever e-auction of sand mining block in Uttar Pradesh has fetched substantial revenue for the state exchequer as compared to the pre e-auction era where the auctions used to get conducted via physical auction.

MSTC is the first company to have conducted e-auction for sale of coal for Coal India in 2004. Since then, the company is conducting e-auctions for sale of coal on behalf of Coal India. Acknowledging experience to handle critical, sensitive and time bound assignments, the company has been mandated to conduct e-auction for sale of iron ore from Karnataka and allocation of coal blocks and mineral blocks of iron ore, limestone, tungsten, diamond, gold, bauxite blocks in various states. MSTC has developed and implemented e-reverse auction portal for imported thermal coal which has made import of coal easy, hassle free and economical.

The company has an experience of more than 190,000 auctions, serving more than 1,10,000 users as on December 31, 2018; conducted 28,600 auctions in FY2018 and 30,500 auctions as on December 31, 2018.

In addition, MSTC has the distinction of holding copyright for e-commerce module developed by the in-house team. Furthermore, MSTC has achieved the status of CMMI Level 3, which catapults the company at a 'defined level' for continuous process improvement in the areas of application software.

The company is also one of the major players in trading of bulk raw material. The trading division is engaged in import as well as domestic sourcing of bulk industrial raw material for actual users as well as traders. This division looks after sourcing, purchase and sale of industrial raw materials like low ash metallurgical coke, HR coil, naptha, crude oil, coking coal, steam coal, line pipes etc. on behalf of its customers. The company is mainly catering to customers across steel, oil and gas, power sectors in private and public sector.

The company intends to further augment and develop recycling business by investing in recycling capacity building. The company is spearheading various initiatives of converting presently unorganized recycling sector into an environmentally sensitive recycling sector. In addition to expansion in the auto shredding venture, the company will in the future foray into recycling of e-waste. The company may partner with an established collector, dismantler or recycler for setting up the e-waste facility in order to dispose and recycle the e-waste in an environmentally sustainable manner. The company will sell the precious metals extracted from e-waste on online platform for better realisation.

The focus will be on further developing the e-commerce business by capturing the untapped markets. The company is working towards bringing onboard historically unorganized products and sectors to create ease in transacting and generating maximum revenue for the principals. This will help to cater to a large customer base as compared to traditional trading. Use of online portals and mobile app to facilitate trade between the domestic producers and players from different industries will eventually result in the elimination of channel partners and commission agents from the value chain and will allow players from across the country to participate in the e-auction.

With the advent of government policies pertaining to implementation of GST and e-way bill, the need for transparency in metal trading has buoyed up. MSTC will endeavour to bring more metal producers on MSTC Metal Mandi portal to sell metals such as steel, aluminium to customers, thereby creating centralised online portal for all of each such metal trade.

The Offer and the Objects

The offer comprises offer for sale by the government of India of 70.40 lakh shares, which, at the lower price band of Rs 121 per share, works out to Rs 213.81 crore and, at the higher price band of Rs 128, works out to Rs 226.18 crore.

The minimum bid lot is 90 equity shares and in multiples of 90 equity shares.

The objects of the issue is to carry out the divestment program of the government of India apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Government of India will hold 74.9% of total paid up equity share capital of the company post listing.

Strengths

One of the leading PSU entities engaged in providing e-commerce services to customers in a most transparent, fair and secured manner.

There is ability to create a virtual marketplace for any physical commercial activity thereby creating value for all the stakeholders.

MSTC is making rapid strides in the e-commerce sector in line with the government policy (ies) of promoting Digital India and e-governance in all sectors of the economy. The company is in the forefront of the implementation of various initiatives of the government such as Digital India to boast transparency and fairness.

Weaknesses

Very volatilite business and fluctuations in markets such as slump in the steel sector and decrease in sale of thermal coal to power plants leading to decline in the volumes of the trading business.

The company is dependent on a few customers for a major portion of the revenues. Revenues from the trading line of business constituted 80.96%, 81.01%, 70.68% and 85% of the total revenues for the half year period ended on September 30, 2018 and fiscals 2018, 2017 and 2016, respectively. The Top 3 customers in trading line of business contributed 93.38%, 68.33%, 67.51% and 71.30% of the total revenues from the trading line of business for the half year period ended on September 30, 2018 and fiscals 2018, 2017 and 2016, respectively.

Under e-commerce vertical, a significant portion of the revenues is derived from government and government-controlled entities. For the H1 ended on September 30, 2018, FY 2018, FY 2017 and FY 2016, revenues from government and government-controlled entities contributed 90.6%, 90.5%, 96.5% and 98.6%, respectively, of the total revenues from the e commerce segment.

The government has significant influence over its operation, restricting the company's ability to manage its business. Increase in salary and allowances of government and public sector employees will increase the expenses and may adversely affect the financial condition in the years of implementation. Further, the company has in the past not complied with the requirements of Companies Act, certain provisions of the Companies Act and/or SEBI Listing Regulations in relation to terms of reference of the Audit Committee and the Nomination and Remuneration Committee.

The company incurred huge losses in the past. There is no consistent track record of profitability. Revenues and profits are highly volatile.

The company relies on the automated systems and the internet in the operation of business and retain customer data, which exposes to risks from systems failures and security breaches cyber-attacks, viruses, malware, break-ins, phishing attacks or other attacks.

The company is facing lots of litigations including criminal and material civil litigations against the company.

There is a dispute with Standard Chartered Bank for a sum of Rs 143.6 crore plus interest of Rs 78.89 crore which, if not concluded in favor of the company, can lead to sale of freehold buildings and other properties of the company.

Valuation

For FY 2018, consolidated net sales were up 30% to Rs 2265.40 crore. The OPM stood at negative 18.2% (compared to positive 7.3% in FY 2017), resulting in loss at OP level of Rs 413.24 crore. Other income stood at Rs 527.75 crore, up by 285%. Interest cost stood at Rs 67.36 crore, down by 1%, while depreciation stood at Rs 12.39 crore up by 2%. Thus, PBT stood at Rs 34.76 crore, down by 81% YoY. After providing total tax of Rs 39.93 crore and share of profit of associates of Rs 1.31 crore. Loss at PAT level for FY 2018 stood at Rs 6.48 crore. Even for the half year ended September 2018, the company has reported net loss of Rs 15.88 crore on revenues of Rs 1476.91 crore. Due to seasonality and volatility in business, half year earnings cannot be annualised.

The company was earlier primarily into trading of steel scrap. It used to import steel scrap on behalf of customers and take 20% as advance. Due to the Lehman crisis in 2008-09, steel prices crashed more than 40%. Customers refused to take the stock due to liquidity and other reasons. MSTC then had to go for one-time settlement with the steel importers and took some financial hit. Later, these steel importers became non-performing assets. Chances of any recovery from them look unlikely.

Hence, the company provided for all possible losses from this event over the past few years. Thus, the company made a provision of around Rs 335 crore in FY 2016, provision of around Rs 36 crore in FY 2017, provision of around Rs 222 crore and write-offs of around Rs 459 crore in FY 2018 and provision of around Rs 128 crore in the half year ended September 2018.

Similarly, other income of FY 2018 included write-backs of past provisions amounting to Rs 499.97 crore. In an interaction with us, the management has assured that there will be no more write-offs on account of this. However, the company's trading business will continue to carry such risk in case of high volatility in commodity prices. If one excludes all provisions and write-offs for doubtful debts, revised consolidated financials show an adjusted EPS of Rs 16.4 in FY 2018, which is discounted 7-8 times by the offer price band of Rs 121-128. There is no comparable listed company.

MSTC: Issue highlights

Offer for sale ( in Rs crore)
- On lower price band213.81
- On upper price band226.18
Total Issue size for fresh issue ( in no of shares in lakhs)176.70
Price Band (Rs)121-128*
Bid size ( in no of shares)90.00
Post issue share capital (Rs crore) 70.40
Post-issue Promoter & Group shareholding (%)64.7%
Issue open date13-03-2019
Issue closed date15-03-2019
ListingBSE, NSE
Rating 30/100
*Discount of Rs 5.5 to retail investors

 MSTC: Reported Consolidated Financials

1603(12)&1703(12)&1803(12)&1809(06)&
Net Sales3225.161739.222265.401476.91
OPM (%)-5.2%7.3%-18.2%4.5%
OP-167.59126.17-413.2466.65
Other in. 82.64136.98527.7514.64
PBDIT-84.95263.15114.5181.29
Interest97.3867.7267.3633.46
PBDT-182.33195.4347.1547.83
Dep.11.6112.1312.396.38
PBT -193.94183.3034.7641.46
EO -0.40-0.050.000.00
PBT after EO-194.34183.2534.7641.46
Tax (including Deferred Tax)52.7643.6439.9356.35
PAT-247.10139.61-5.17-14.90
Share of Associates0.00-4.70-1.31-0.99
PAT after MI and share of Associates-247.10134.91-6.48-15.88
EPS (Rs)*-19.2--
*EPS is on post issue equity capital of Rs 70.40 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

MSTC: Revised Consolidated Financials

1603(12)&1703(12)&1803(12)&1809(06)&
Net Sales3225.161739.222265.401476.91
OPM (%)-5.2%7.3%11.9%13.2%
OP-167.59126.17268.68195.26
Other in. 82.6447.8927.7814.64
PBDIT-84.95174.06296.46209.89
Interest97.3867.7267.3633.46
PBDT-182.33106.34229.10176.44
Dep.11.6112.1312.396.38
PBT -193.9494.21216.71170.06
EO expense-0.40-89.04181.95128.60
PBT after EO-194.34183.2534.7641.46
Tax (including Deferred Tax)52.7643.6439.9356.35
PAT-247.10139.61-5.17-14.89
Share of Associates0.00-4.70-1.31-0.99
PAT after MI and share of Associates-247.10134.91-6.48-15.88
EPS (Rs)*-10.716.4#
*EPS is on post issue equity capital of Rs 70.40 crore of face value of Rs 10 each
EPS excludes EO and relevant tax adjustments. EO: Extraordinary items (provision,
write-offs and write-backs on account of doubtful debts)
& FY 13 and FY 14 financials are as per Old Ind AS while FY 15, FY 16, FY 17 and
FY 18 financials are as per New Ind AS
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

Powered by Capital Market - Live News

 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
40-44 High risk high return Avoid, however active risk seekers can try
Below 40 High risk, low/moderate return, Moderate risk low return Do not subscribe