MSTC Ltd IPO review (May apply)

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Review By Dilip Davda on March 11, 2019

• A 'Mini Ratna' PSU's maiden IPO.
• The company has three verticals, Trading, Recycling and E-Commerce.
• Most preferred partner for e-commerce/e-auction/e-payment solutions.
• Despite cleaning of balance sheet process, it paid un-interrupted dividends.
• It is a safe bet for long term investment considering fast forward mode.

ABOUT COMPANY:
MSTC Ltd. (MSTC) (erstwhile known as Metal Scrape Trading Co. Ltd.) is a 'Mini Ratna' PSU. It was started in 1964 and was the major player in scrap import and export being regulated commodity then. It uses to derive major revenues from these activities till the late nineties. Now its revenue from scrap business is just around 10% and the rest from three verticals i.e. e-commerce, recycling and trading. Currently, it is one of the leading PSU entities 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. 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. MSTC is one of the key players offering a comprehensive range of services in e-procurement segment. (Source D&B Report).

With an experience of over 1,90,000 auctions, serving over 1,10,000 users as at December 31, 2018, it has emerged as the preferred service provider for various government and Government controlled entities which is demonstrated by the fact that it gets repeat business from the same client.

MSTC has conducted 28,600 auctions/events during Fiscal 2018 and 30,500 auctions/event for nine months period ended December 31, 2018. Since Fiscal 2002, the Company is the offering e-auction platform to a large number of Government departments and Government controlled entities. It offers the complete package of services from preparation of the auction catalogue to the issuance of delivery orders and advertisements of the same on the case to case basis with e-payment and e-wallet facilities. Starting with the sale of coal through e-auction way back in 2004, MSTC has been developing different modules of e-auction such as lot wise auction, price quantity auction, tender cum auction, e-tender etc to cater to the various needs of different sellers. 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. A key characteristic of e-auction is transparency in conducting these services. MSTC is working towards bringing onboard historically unorganized products and sectors to create ease in transacting. It is a nominated service provider for all major mineral blocks and minor mineral blocks of a few states namely, Assam, Chhattisgarh, Jharkhand, Rajasthan and Uttar Pradesh. E-auction of sand mining blocks in Uttar Pradesh has been one of the signature events in recent past.

MSTC's e-commerce system complies with CVC guidelines and IT Act and its subsequent amendments to ensure services to customers in a most transparent and fair manner. To expand its spectrum of operation and to support the steel industry in India, in FY 2017, the company through MMRPL (Mahindra MSTC Recycling Pvt. Ltd.) forayed into the recycling sector. MMRPL is poised to set up one of the organized states 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.

ISSUE DETAILS/CAPITAL HISTORY:
For listing benefits and meeting disinvestment targets, MSTC is coming out with its maiden IPO of 17670400 equity shares of Rs. 10 each via offer for sale by Government of India. The issue is through book building route and it has a fixed price band of Rs. 121 – Rs. 128 per share. MSTC mulls mobilizing Rs. 213.81 cr. to Rs. 226.18 cr. based on lower and upper price bands. The company is offering Rs. 5.50 per share discount to retail and eligible employees. The issue opens for subscription on 13.03.19and will close on 15.03.19. Minimum application is to be made for 90 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue is solely lead managed by Equirus Capital Pvt. Ltd. and Alankit Assignments Ltd. is the registrar to the issue. The company has reserved up to 70400 shares for eligible employees and the rest will be offered to the public including QIBs (13200000 shares), HNIs (2640000 shares) and Retail investors (1760000 shares). Issue constitutes 25.10% of the post issue paid up capital of the company.

MSTC has issued entire equity at par so far and has also issued bonus shares in the ratio of 1 for 1 (February 1994), 3 for 1 (September 2012), 1 for 1 (July 2016), 1 for 1 (May 2017) and 1 for 1 (January 2019).

The average cost of acquisition of shares by the promoters is Rs. 0.049 per share.

FINANCIAL PERFORMANCE:
On the financial performance front, for last three fiscals, MSTC has (on a consolidated basis) posted turnover/net profit (Loss) of Rs. 3307.80 cr. / Rs. – (247.10) cr., (FY16), Rs. 1876.20 cr. / Rs. 139.15 cr. (FY17), Rs. 2793.15 cr. / Rs. – (6.48) cr. (FY18). For the first six months of FY19, it has posted a loss of Rs. – (15.88) cr. on a turnover of Rs. 1491.55 cr. Due to deferred taxes provisions, the bottom line has shown negative trends for FY18 and H1 of FY19. For the last three fiscals, the company has posted an average EPS of Rs. 0.28 and an average RoNW of (2.55%). The issue is priced at a P/BV of 2.75 (at upper price band) on the basis of its NAV of Rs. 46.58 as on 30.09.18.

According to management, MSTC has opted for cleaning of its balance sheet before IPO and has opted aggressive write-offs of its FY11 and FY12 transactions. Its provisioning is almost over and is now has a clean slate. Due to this process only, it has shown negative earnings. Despite book losses, it has paid dividends for all these years. Now, this company is in fast forward mode and any recovery of provisioning will add to its bottom lines. .

COMPARISION WITH LISTED PEERS:
As per offer documents, it has no listed peers to compare with.

MERCHANT BANKER'S TRACK RECORD:
On BRLM's front, this is the 2nd mandate from this merchant banker in the last three fiscals. The only one listing that took place so far (i.e. of Shankara Building) opened at a premium of 20.66% on the day of listing

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