MSTC IPO Review: Rags (scrap) to riches?

MSTC Limited (formerly known as Metal Scrap Trade Corporation Limited) is coming up with its maiden public offer on 13 March. Priced in the range of INR121 – 128 per share, the IPO will offer a discount of INR5.50 per share to retail investors and employees. A total of 17,670,400 shares will be sold by the government, amounting to as much as INR226.18 crore at the upper end of the IPO price band. Minimum bid lot is 90 shares and in multiples thereafter. Through MSTC IPO review, our aim is to find out if the offer is a worthwhile investment for retail investors.

Here are some important details about the IPO:

MSTC IPO details

Subscription Dates 13 – 15 March 2019
Price Band INR121 – 128 per share (Retail, employee discount – INR5.50 per share)
Fresh issue Nil
Offer For Sale 17,670,400 shares (INR213.81 – 226.18 crore)
Total IPO size 17,670,400 shares (INR213.81 – 226.18 crore)
Minimum bid (lot size) 90 shares
Face Value  INR10 per share
Retail Allocation 10%
Listing On NSE, BSE

MSTC IPO Review: Only OFS, no fresh shares

The IPO of the Mini Ratna company will only involve an Offer For Sale (OFS) by the government. As such, the company will not get any proceeds from the IPO. Currently, the President of India owns 89.85% equity in the company. Following the IPO, the government’s shareholding will reduce by 25.1%.

MSTC IPO Review: Scrap fortunes

MSTC

As we mentioned in our What you need to know article, MSTC started as a metal scrap trading company and gradually diversified into other business lines. Currently, the company operates in three major business segments – Trading, E-Commerce and Recycling.

Trading is still the biggest segment and contributed nearly 81% to MSTC revenues in H1 FY2019. The company primarily deals in commodities such as metal scrap, DR pellets, DRI, calibrated lump ore, HBI, etc; Coking Coal & Coke; Finished and semi-finished steel items like HR coil, CR coil, wire rods, billets, etc; Petroleum & petrochemical products; Industrial raw material, preferably bulk in nature or high values; and Imported thermal coal.

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It is not uncommon to see PSUs struggling with new technologies but MSTC has embraced and has actually emerged as a pioneer in e-commerce. MSTC started offering its e-auction platform to government departments and government controlled entities in 2002 before moving into e-procurement services in 2012. MSTC also develops e-commerce modules and has achieved status of CMMI Level 3 maturity.

Recycling is a relatively new addition and the JV with Mahindra Intertrade is yet to commence full operations.

MSTC IPO Review: On a (financially) sticky wicket

MSTC’s fortunes are closely linked with its trading business which is driven by the requirements of other government departments and government controlled entities. As one can imagine, several factors play a role in this and it is not unthinkable that bureaucracy and clearances in some departments have a negative impact on MSTC’s trading volumes. This was indeed the case in 2017 when its revenues dwindled substantially. Incidentally, this was the only time in the last three years MSTC posted a profit (more on this later). In line with the string of losses, only 10% of the offer is reserved for retail investors which translates into just INR22.6 crore.

MSTC’s financial performance (in INR crore)

FY2016 FY2017 FY2018 H1 FY2019
Total revenues 3,307.8 1,876.2 2,793.2 1,491.6
Total expenses 3,501.7 1,692.9 2,758.4 1,450.1
Profit after tax (265.8) 133.4 (9.8) (12.2)
Net margin (%) (8.0) 7.1 (0.4) (0.8)

MSTC IPO Review: Swinging revenues and volatile earnings, why should I even care about this IPO?

Without a doubt, looking at the profit and loss account of the company doesn’t inspire confidence. However, we need to look beneath the surface to ascertain if there are any positives.

MSTC’s earnings are not just directly linked with top line as several other factors also play a role. We have already mentioned its dependence on other government bodies as a key factor. Its top three customers in the trading line of business contributed 93.38% of total trading revenue in the half year ended on 30 September 2018.

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MSTC is exposed to several risks and counter-party default risk is a major one. The company management has stated that its financial performance in recent years has been impacted by bad debts. In H1 FY2019, there was an allowance of INR128.6 crore for bad and doubtful advances and the company wrote off another INR459.4 crore in FY2018. Writing off of these advances and loans has hampered profitability but the management has indicated such provisioning is largely over and any recovery is likely to help profitability.

The company’s presence in e-commerce segment is also positive. The e-commerce segment contributed just 7% to MSTC’s total revenue for the six months ended 30 September 2018. However, it is noteworthy that e-commerce revenues have increased in each of the last three years and its contribution to MSTC topline jumped from 3.9% in FY2016. MSTC also has plans to license its platform and technology to companies in private sector.

Although it remains to be seen if these attempts lead to a meaningful reduction in its reduction on government, there are some positive early signs. This dependency is steadily coming down and the government entities accounted for 90.58% of MSTC’s e-commerce business in the H1 FY2019, down from 98.58% in FY2016.

Similarly, the presence in recycling business is a great positive. Although the business is yet to start in a full-fledged way, there is immense potential in it considering the huge domestic consumer market we have when it comes to automobiles and white goods.

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Another factor for investors to consider may be the healthy dividend yield MSTC offers. Despite losses, the company has paid dividends regularly and the pay out of INR7.4 per share paid in H1 FY2019 translates into a yield of 5.8%. There is also a discount available for retail investors but that should be least in the list of considerations.

As the company has not been consistent with profits and posted losses in the previous years, there is no point talking about earnings based valuation. Accordingly, the answer to “Is MSTC IPO worth investing?” will depend on the individual’s risk appetite and the willingness to take management’s word on face value. Feel free to check out our discussion page to check what other investors have to say about MSTC IPO.

Disclaimer – The objective behind MSTC IPO Analysis is to offer an unbiased view of the company’s operations, offer details, strengths, weaknesses, financial performance and valuation. The framework helps investors in taking a call if MSTC IPO is worth investing or not. Nevertheless, this is not an IPO recommendation to subscribe or avoid and the decision to invest should be based on individual investor’s risk profile.

MSTC IPO Review: Rags (scrap) to riches?
4.6 (91.43%) 7 vote[s]

Krishna Bagra

Coming from a family of investors and financial analysts, Krishna learnt wading through regulatory filings pretty early in her career. At IPO Central, Krishna plays twin roles of contributor and head of research desk. She can also be reached at +krishnabagra .

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