MSTC Ltd - A turnaround business case study of a PSU.

MSTC Ltd. - Mini Ratna - I PSU, already up more than 50% in the last 1 month.

A turnaround story, how once a debt-ridden and loss-making company is on a roll upward?

 

Once a trading company which used to procure industrial raw materials on behalf of its customers. This ended up the company with losses and huge bad debts.

The management has reduced the trading revenue share from more than 80% in 2018 to less than 5% now.

 

The balance sheet of the company is being gradually cleared up by writing off bad debts. And now the company is emerging in a sector with more than 50% margins.

The company has stepped into the e-commerce business, no it's not competing with Amazon or Flipkart. It's in the business of e-auctions, e-procurement, and e-solutions providers.

Let's talk about it in detail. 

E-auctions - MSTC has created an electronic marketplace where e-auctions take place where several buyers bid for one seller's goods. 

The company has been providing services to a large number of government departments. Also, private sector participation is gradually increasing with the likes of Reliance, Tata, L&T, Vedanta etc. landing on the marketplace.

The network effect drives growth, which states that when more people use a product or service, its value increases. (For eg - Whatsapp)

Goods transacted on its marketplace:- 

It experienced transactions worth more than 3 lakh cr. in FY23 compared to 1.36 lakh cr. in FY22.

Management gave a guidance of transaction value of around 1.5 lakh Cr. in FY24.

As per the Concall, most of its revenue is not related to Volume. It is on an event basis. There is no correlation between the volumes and the value for the majority of the activities that they do in e-commerce.

That means, even after transaction value drops by 50%, we can see a revenue growth of 15-20% in FY24.

Bifurcation of goods transacted:-

50% - Scrap (remember, will be referred later)

The other 50% comes from - Coal blocks, minerals, forest agro produce, waste material like fly ash etc.

Thus, scrap is the backbone of the business.

Rights:-

-Mandatory auction of scrapped govt. vehicles under the new scrapping policy through MSTC.

-Nominated agency for the majority of mineral blocks in various states/UTs.

Pros:-

Transparency on the platform

Government support

Better price discovery (Network effect)

Cons:-

Government control

Dependent on few big customers.

Inconsistent revenue (peaks because of rare events like telecom spectrum auction)

M-Junction, a 50:50 Joint Venture between SAIL and Tata Steel operating in the same industry with similar revenue, makes this party even more interesting.

We've already talked about the major part of the business let's move on to the next part. Which are e-procurement and e-solutions.

E-procurement contributes less than 1% of the revenue. It basically includes tenders.

E-solution which contributes approx. 5% of the revenue includes developing ERP solutions software like inventory management, F&A, HRM software, dashboards etc. 

Over the years, MSTC has delivered certain e-bidding packages to various govt. departments. Some of the platforms are UDAN, DEEP, SHAKTI, eBKray portal etc. 

As per management, it is not a constant revenue stream.

So far, we've discussed trading and e-commerce. Now let's move to other parts of the business that are FSNL and MMRPL. 

Ferro Scrap Nigam Ltd (FSNL) is a wholly owned subsidiary of MSTC which contributes around 50% of the revenue. It undertakes the job of recovery and processing of scrap from slag and refuse generated during iron and steel-making steel plants. It also offers various other services related to scrap.

It is divestment bound by GOI under DIPAM (Department of Investment and Public Asset Management).

It's been more than a year and a half, but the management has no clue as to when will this happen. MSTC is just a part without having any management control over MSTC. It is controlled by the Ministry of Steel.

Now connecting the dots, 50% of the transaction value of MSTC is from scrap, and also FSNL is a profitable business.

Is it strategically sane to divest FSNL for MSTC?

The next and last part of the business which can bring tremendous growth to its revenue in times to come is its 50:50 JV with Mahindra Accelo (a wholly owned subsidiary of M&M) - Manindra MSTC Recycling Private Limited (MMRPL).

MMRPL is in the business of scrapping Vehicles and owns 8 Registered Vehicle Scrapping Facilities (RVSF) with other collection units.

This JV is at a loss right now because of supply constraints of raw materials and Infrastructure in the country. 

The government in its New Scrapping Policy has stated that all government vehicles older than 15 years (end-of-life Vehicles) to be scrapped which will be auctioned on "MSTC".

Private vehicles are to be tested at Testing stations, which will then be either registered or scrapped. 

Because of a lack of Rules made by State governments for scrapping and a lack of infra like testing centres, MMRPL is operating at less than 10% of its capacity.

It is a slow process, but it can bring a huge business for them.

MMRPL is very well integrated into the value chain.

Mahindra to sell the cars.

If scrapped, auction on MSTC.

MMRPL to buy from the auction and then scrap it.

Mahindra will buy the processed scrap to use as raw material or processed scrap to be auctioned on MSTC again.

Mahindra in 2021, has signed an MoU with MMRPL to offer its customers an end-to-end solution for scrapping their vehicles.

If you've reached the end, there's more to come for MSTC. Its Financial Analysis and Valuation are yet to come. Till then you can join the discussion on X/Twitter - https://x.com/Devansh__Singla/status/1746551639975379411?s=20

Regards

Devansh Singla