IPO Analysis: MSTC

IPO Rating - 40 (Avoid Investment)*

About the Issue

MSTC, which was earlier knows as Metal Scrap Trading Corporation, is a Mini Ratna category- I PSU company. It is entering the capital market to raise around Rs 226 crore at the upper band and at the lower band, it will raise around Rs 213 crore. The price band is fixed at Rs 121-128. A discount of Rs 5.50 per equity share would be offered to the retail and eligible employee bidders. The total number of shares for sale is 1.76 crore, which is entirely offered for sale by the government of India (promoter) and the entire proceeds will go to the government and not to the company. The issue constitutes 25.10% of the company’s pre-offer paid up equity share capital.

About the company

MSTC stated its operation as a trading company in 1964 as a dealer of export of scrap. Now they have grown to a diversified multi-product services and trading company. The company primarily operates in three main business verticals which are namely, (i) E-commerce, (ii) Trading, and (iii) Recycling through MMRPL.

Under e-commerce vertical company provides e-commerce related services across diversified industry segment offering e-auction/e-sale, e-procurement services and development of customized software/solutions. Till the end of December 31, 2018, the company has done over 1,90,000 auctions, serving over 1,10,000 users. Since Fiscal 2002, MSTC is the offering e-auction platform to a large number of Government departments and Government controlled entities. The company has conducted e-auction for sale of scraps, old plant & machinery, minerals, agricultural produce, coal and non-coal mine blocks, land parcels, tea, gorgon nut, tendu leaves, timbers and other forest produce, etc.

Trading had been the business, with which company started its operations. Currently, 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 company’s customers. They are mainly catering to customers across steel, oil and gas, power sectors in the private and public sector.

Recycling is the third business vertical that company operates. In FY 2017, company through MMRPL forayed into the recycling sector. MMRPL is poised to set up one of the organized state of the art auto shredding plant in India for recycling ELVs and other white goods by converting these into shredded scrap which is a vital raw material for steel plants. A collection and dismantling centre with state-of-the-art technology has been set up in Greater Noida, State of Uttar Pradesh as a supply feedstock for the auto shredding plant.

Financials

For the financial year ending March 2018, the company’s total turnover stood at Rs 2265.4 crore compared to Rs 1739.2 crore an increase of 30.25 per cent on yearly basis. Trading still constitutes major revenue earner for the company. At the end of FY18, revenue from this segment constituted 69% of the total revenue of the company which is the same as the year before. Next biggest contributor to the company’s revenue is the processing of scrap material that contributed 14% of total revenue compared to 18% last year.  

Despite company posting huge revenue growth, total expenditure of the company grew even at a higher pace of 58 per cent.  This resulted in the fall in the net profit by 5 per cent in the same period.

Valuation and recommendation

At upper price band, the issue is asking for market cap to sales (FY18) of 0.4 times, which is the only good part of the valuation of the offer. The price to sales (FY18) of the company is at 2.4 times, which looks expensive.  The financials of the company has been also quite volatile. In last three year ending FY18, topline of the company has increased once and has fallen once on a yearly basis. If we annualised the half-year sales of the company, we will see FY19 sales increasing by 5 per cent. The company has not been able to generate positive RONW three times in last four year including H1FY19. Hence, we advise our readers to skip this issue.    

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment