*MSTC* Transformational journey from being trading company into Ecommerce player
Recovery in E-auction revenue is the key monitrable for MSTC
MSTC,a government-owned entity incorporated in 1964 is a category -1 Mini Ratna public sector undertaking under the administrative control of the Ministry of Steel. MSTC, which started off as a small canalized agency has transformed itself into a E-commerce player in the B2B (business to business) space.
MSTC came out with an IPO in March 2019 at Rs 128 per share. The purpose of the IPO was divestment of Government of India's stake.
Service offering from MSTC
Line of business
MSTC has three main business verticals in the company namely
E-commerce: MSTC is engaged in providing e-commerce-related services across diversified industry segments, offering e-auction/e-sale, e-procurement services and development of customized software/solutions. It has 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.
Trading: The trading division is engaged in import as well as domestic sourcing of bulk industrial raw materials for actual users as well as traders. They mainly cater to customers across steel, oil and gas, power sectors in private and public sectors. These include cash-and-carry model, 110% bank guarantee-backed procurement and associate supplier model.
Recycling plant through MMRPL: Joint venture with MIL catering mainly to scrappage of old automobiles. As per various media reports, auto scrappage policy is likely to be announced soon, which can help ensure continuous supply of end-of-life vehicles for the running plant of their joint venture company.
What makes us positive on MSTC
Focus on E-commerce business
MSTC already has a proven track record in offering e-auction platforms for various products and services across user industries. It is a nominated agency for allocation of coal blocks and all other mineral blocks through its customized e-commerce platform. Auctioning of the 50 coal blocks for commercial mining which has been mandated will also be provided by MSTC.
MSTC is also aggressively pursuing the e-procurement business, which has a promising outlook. It has developed end-to-end solutions for one of its clients for the purchase of coal. The company has also tied up with all major state-owned banks for using the MSTC platform for their NPA-related asset auctions. It conducts auctions at regular intervals both for movables and immovable assets.
Recently, MSTC has been mandated by the government for conducting the 4G and 5G telecom spectrum assets. As per the management, though the fee component is not large enough, MSTC will nevertheless have immense experience in handling and providing these services to others.
The fee MSTC receives for providing the e-commerce platforms varies from fixed fee to variable fee, depending on the contracts with the parties and the nature of the agreement. In FY20, growth in the E-commerce segment was impacted due to Covid-19.
Divestment of Ferro Scrap Nigam Ltd (FSNL)
FSNL undertakes the job of recovery and processing of scrap from slag and refuse generated during iron and steel making at steel plants. DIPAM (Department of Investment and Public Asset Management) has been mandated for the divestment of FSNL, which is a 100 percent subsidiary of MSTC. In FY20, FSNL reported a profit after tax (PAT) of Rs 31 crore. With this divestment, capital employed will reduce for MSTC. Valuing FSNL even at P/E of 8x, MSTC can get around Rs 250 crore.
Major beneficiary of the scrappage policy likely to be announced soon
MSTC is likely to be major beneficiary of the scrappage policy that is slated to be announced shortly. MSTC already has a joint venture with MIL (Mahindra Intertrade Limited). The company will be able to sell all the scrap it generates by recycling on its e-commerce platform. Based on various reports and media articles, scrap worth Rs 1 lakh crore is likely to come to the e-auction platform where MSTC can earn a commission based on revenues.
Discontinuation of the trading business
MSTC operated mainly through three models namely: cash-and-carry, 110 percent bank guarantee-backed procurement model, and associate supplier model. Being a trading business, after adjusting for the expenses and margins, MSTC was left with negligible profits. As per the management, MSTC has discontinued the cash-and-carry business from March 2020. The company suffered huge losses due to the write-off of bad and doubtful debts, which led to significant losses. In FY19, MSTC made provisions amounting to Rs 542 crore as compared to Rs 71 crore in FY20. With the shutdown of the cash-and carry-business, MSTC's revenue will decline going ahead. However, given the lower profitability of this business, its absence would not impact profitability.
Outlook and valuation
The transformation from a trading company to a pure e-commerce player will change the public perception of MSTC. Looking at their profit and loss, MSTC has around Rs 100 crore as fixed expenses (Rs 71 crore as employee cost and others) which is likely to remain constant given the nature of the business. With higher growth in the e-commerce segment and no trading revenues, we can expect higher operating leverage, given the nature of the business. Trading income was basically a drag on the overall business with higher bad debts and higher working capital requirement along with negligible contribution to profit. Higher operating cash flows, zero debt, higher return ratios and higher dividend payout from MSTC could lead to a re-rating. In FY20, MSTC paid Rs 3.30 per share as dividend. Based on the free cash flow which will be generated from the e-commerce business, we expect a higher dividend payout in the future.
MSTC is currently trading at P/E multiple of 9x based on FY22E earnings. Though MSTC is currently trading at reasonable levels, investors should accumulate MSTC on decline given the sharp run-up it has witnessed from March to September.