IPO Review

This scrap trading company is all set to light the primary market flames! Here’s why it is an “Avoid”!

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A scrap trading company by the name of MSTC (Metals Scrap Trade Corporation) is all set to light the primary market flames again. But should you subscribe to this PSU IPO? Read on !

About the Company

Incorporated in 1964 as a trading company to regulate the export of scrap, MSTC has grown into a large diversified, multi-product services and Trading Company. It was a canalizing agency for import of ferrous scrap until 1992. After de-canalization, the Company has established itself as one of the leading e-commerce service providers in the country and is one of the major players in trading of bulk raw material. It has also entered into the recycling business through a 50:50 joint venture with MIL for setting up a shredding plant and collection centers across the country.

Promoters –

The Promoter of MSTC is the President of India acting through the Ministry of Steel, Government of India.

Objects of the Offer –

Since this is an Offer for Sale, the company will not receive any proceeds from the Offer and all the proceeds shall go to the Selling Shareholder.

Issue Size is Rs 226 Cr.

Risks –

India’s B2B e-commerce industry is characterized by low entry barriers. There are new companies which are venturing into B2B e-commerce and may engage themselves in conducting e-auction and/or e-procurement without proper infrastructure.

The revenues generated from the contracts which are awarded to MSTC by the government and government-controlled entities constitute 90.58%, 90.49%, 96.53% and 98.58% of total revenue from e-commerce segment for the half year period ended on September 30, 2018, and Fiscals 2018, 2017 and 2016, respectively. Since they rely heavily on government and government-controlled entities, any change in GoI policies with respect to their business could lead to significant changes including adverse changes in the business.

The Company has incurred loss after tax of Rs 158.84 million, Rs 64.81 million and Rs 2,471.00 million in half-year period ended on September 30, 2018, Fiscal 2018 and Fiscal 2016 respectively based on the Restated Financial Statements. The said losses are primarily due to bad debts being written off and provisioning done for other bad and doubtful advances and debts.

Profit & Loss –

The company reported a loss of Rs 265 Cr in FY16, a loss of Rs 97.91 lakhs in FY18, and a loss of Rs 1.58 Cr as on September 30, 2018. Trade receivables amount was double its revenue as of September 31, 2018.

Valuations

The company reported a negative EPS of 2.26 for the Half year period ended September 30, 2018, and its Return on equity was -4.84% for the same period. Its book value (Half year period ended on September 30, 2018) is Rs 46.58, which values the shares at 2.75x book value at the upper price band of Rs 128.

Conclusion –

The above valuation metrics show that that company is heavily overpriced even though the company is loss-making. At the same time, it is a complete offer for sale which means that the company will not receive any proceeds from the issue and hence this issue is a clear “Avoid”.

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1 Comment

  1. Sahi hai. The fundamentals itself suggest the most likely scenario. After the IPO the price these stocks is going to plunge.

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