E-commerce has been the main growth driver for MSTC (NSE: MSTCLTD, BSE: 542597) and remains the key focus area going forward. The total value of E-commerce business grew at 59% CAGR while revenues grew at 18.6% CAGR during FY16-19. Their E-commerce business primarily consists of E-auction and E-procurement.

E-auction comprises of forward e-auction for scraps, condemned items, old plant and machinery, surplus stores, land parcels, etc. and e-sales of minerals and various other raw materials for a large number of government departments/PSUs. It primarily consists fee income generated from auction of scrap and e-sale, coal and iron ore. The value of e-auction business grew at 32% CAGR during FY16-19. This was largely driven by the increase in scrap disposal and e-sale business (55% CAGR FY16-19). Coal e-auction and iron ore auction business registered a growth of CAGR 6% and 22% during FY16-19 respectively.

E-procurement involves user friendly technology or a platform to simplify and streamline the purchase process and to integrate buyers and supplier’s business processes. The value of e-procurement business grew at 116% CAGR during FY16-19.

Segment contribution to total e-commerce revenue
	FY16	FY17	FY18	FY19
Scrap Disposal & E-sale	30%	37%	27%	28%
Coal e-auction	31%	22%	14%	9%
Iron ore auction	18%	11%	9%	8%
E-auction	78%	70%	50%	45%
E-procurement	22%	30%	50%	55%

Standard Chartered Bank Litigation

MSTC is currently facing a dispute with Standard Chartered Bank with respect to a receivable purchase agreement dated August 29, 2008 wherein, SCB had agreed to purchase the receivables from the company in relation to the export of gold jewellery. SCB insured this transaction with ICICI Lombard General Insurance Company. After the debtors failed to repay the outstanding amount, SCB claimed the amount from ICICI Lombard who then repudiated the claim of SCB. SCB then converted the trade receivables into debt and filed a case against the company in DRT, Mumbai for recovery from the company alleging default in payments to be made by the company in terms of the RPA. No decision has been made on this until now.

Best Case Scenario – If MSTC wins this dispute, SCB would have to pay up an amount close to INR 200 crores. MSTC will be able to realise a substantial amount of the outstanding receivables.

Worst Case Scenario – If MSTC loses this dispute, the company will not only have to pay the said amount but also have to write down its receivables. The company has cash of INR 95.2 crores as on March 31, 2019. As per management’s commentary, adequate provisions have been set up if in case an unfavourable ruling is passed.

Is MSTC a good investment option?

MSTC was incorporated in 1964 as a trading company to regulate the export of scrap materials and today it has grown into a large diversified, multi-product services and trading company. It was a canalizing agent until 1992 after which MSTC established itself as one of the leading e-commerce service providers and one of the major players in trading of bulk raw material. It offers comprehensive range of services in e-procurement segment.

The following factors show why MSTC is making a turnaround:

• MSTC has enjoyed the First Mover Advantage and has proven track record and ability to create virtual marketplace for any physical commercial activity in India. With its robust IT infrastructure including latest features as mandated by CVC guidelines & IT Act 2000 requirement for PSUs ensures e-commerce services are provided in a secure and transparent manner.
• With an experience of conducting over 1,90,000+ auctions with ~35,000 auctions in FY19 and serving over 1,10,000 users as on December 31, 2018, it has emerged as the preferred service provider for various government and Government controlled entities which demonstrated by the fact that it gets repeat businesses from the same clients.
• The management has been vocal about de-focussing the capital-intensive trading business.
• MSTC in 4Q19 has entered into agreement with Reliance Industries for providing e-commerce service for disposal of scrap. MSTC also expects new avenues of business going ahead once the current volume stabilizes. Going ahead, management is actively looking for new partnerships in the private sector giving huge opportunities.
• Rising penetration of government in B2B segment is also reflected in the healthy growth of e-tender volume and value on CPPP (Central Public Procurement Portal) portal for organization/states/UT. Total value of e-tender floated on CPPP portal grew at ~39% CAGR during FY16-19 to INR 18.1tn while volume of tenders processed have grown at 38% CAGR to 1.4mn during the same period.

However, an investor should carefully track the developments in the company before investing due to the following factors:

• Although the e-commerce business has been growing at an impressive CAGR during FY16-19, the contribution of e-commerce business to the total revenue is still under 10%. Poor operating metrics in Trading and subsidiary (FSNL) business continue to weigh in on e-Commerce profitability.
• As per FY19 Annual report, top 3 customers of the trading segment contribute to 83% of the total revenue. Loss of business from any of these customers will adversely affect the business and impact the profitability of the company.
• The company relies heavily on government projects to generate revenue. The management’s decision to shift to private sector to capture business and stabilise revenue is a welcome step. However, the company will face intense competition due to low entry barriers in the private sector which will lead to lower realizations to gain market share.
• Since majority of the company’s business comes from the government, any change in government policy can adversely impact the operations of the company.
• MSTC is involved in a litigation with SCB (Standard Chartered Bank), which if lost could adversely impact operations and financial conditions of the company.

We believe the following triggers could lead to re-rating:

• The management’s de-focus of the trading business is a welcome step towards a leaner balance sheet, reduced capital requirements and accelerated revenue growth. The contribution of trading business to the total revenue is still hovering around 85-90%. Given the capital-intensive nature of the business, any adverse scenarios in trading will under weigh the profitability of e-commerce business.
• MSTC Is making efforts to resurrect the dwindling trading business by ramping up the 110% Bank Guarantee based procurement business model. Besides this, MSTC is gearing up to take up &-Commerce enabled trading business for Government companies only which will be less risky business than the existing trading business model.
• With the Government of India’s push for B2B and B2C e-commerce market, MSTC stands to enjoy increased number of business opportunities coming their way. MSTC’s strength lies in its ability to convert any business activity conducted through brick and mortar method to online activity and has a proven track record of providing e-Commerce platform for various types of products across diverse industries.
• Although the e-commerce business contributes 85-95% of the total business volume, the revenue contribution continues to be low. Given the commodity and event-based nature of the e-auction business, the company should concentrate on increasing their e-procurement business to ensure stabilised revenue flow.
• MSTC in a JV with Mahindra Accelo has set up a collecting cum dismantling collection centre in Greater Noida which recycles cars, trucks & buses, two wheelers, industrial scrap and white goods and is operational since November 2018. Though revenues were insignificant on account of company awaiting scrappage policy, introduction of the same could accelerate revenue growth. Company is betting big by setting up 4 plants in various parts of the county.

Closing Thoughts

Although the management has been taking positive steps to make MSTC an asset light cash rich business, we are yet to see any concrete improvement in the profitability of the company. Various segments of the company are dependent on government policies to operate. Uncertainties and delay in implementation can adversely affect the operations and profitability. An investor should therefore wait and watch for optimistic signals to get into the company.

 

Team 3C Capitals