Thursday, 7 November 2019

MSTC Ltd: In a Parallel world it is trading at 50 PE


Dear All  MSTC Ltd  is my recent entry and I think market may have made a grave mistake in valuing this one as some trading entity with high debtors issue and concluded at worrying levels of working capital but they could not realize that this is the thing of the past and valuation in stock market is derived from the future. MSTC in its new avatar is scaling down its working capital intensive trading business and is focusing on new age businesses- B2B ecommerce and scrapping of old vehicles and both these businesses are stunning.

People run after the likes of Flipkart madly which are incurring huge losses and business model is not that strong because in my view they are yet to add value in the supply chain of a product. They have established themselves so far as discounting entities rather than adding some value to the entire process by bringing the cost of distribution down and then passing on the same in the form of reduced prices to common man which sadly is not the case. Flipkart has sold merchandise valued Rs. 42000 cr on its platform and with astronomical losses.

Compared to this, MSTC on its B2B platform executes transactions of some 1.25 lac cr with revenues of  220 cr and around 150-180 cr as profits (not calculated, just rough idea) and I find it hard to believe that people are dying to buy fancy huge loss making B2C start ups but ignoring B2B businesses available cheap. B2B ecommerce has much bigger transaction value, much larger transaction volumes and very sticky revenue stream and clients. The problem not solved by B2C ecommerce is solved by B2B ecommerce and they provide tremendous value to the businesses wanting to save time and costs, maintain the quality and security in procuring goods. B2B Ecommerce is very matured and adds immense value by providing reliable and secure trading, saves time and ensures fair price discovery.
 

Just imagine the time and effort required by Mahindra and Mahindra to source scrap steel for its auto division- selecting vendors, preparing bids, evaluating bids and then logistics and payment etc. All this requires and consumes resources and time but on B2B platform of MSTC the same can be executed extremely fast and discovered price will be much lower due to large numbers of vendors competing each other. Due to these reasons, B2B ecommerce has high networking effects just like Naukri.com which is always profitable for last 2 decades and nobody could grab the market share from it. This happens because of the first mover advantage where large numbers of sellers and buyers provides huge networking effects.

I am also surprised at the lower valuations demanded by Government while going for the IPO. Let me share something here. Mjunction is another B2B ecommerce player which competes with MSTC. Tata steel and Sail are 50:50 JV partner in it. It executes orders to the tune of 1.5 lac cr and its revenue is around 257 cr and NP is around 45 cr last year (MSTC appears to have much higher profits but that I think may be due to the fact that entire resources are allocated also among other verticals with high turnover…but I am yet to compute the NP but in any case the same is going to be very high in percentages). Tata steel is looking to sell its 50% stake and it is looking at valuation of some 3000 cr at 70-75 PE. So we can also value MSTC ecommerce business around 2000 cr to 2500 cr quite easily while current valuation is just 800 cr trading at PE ratio of around 6-7!!. Further, Flipkart has been valued around 1 lac cr in the last deal by Walmart!!! This gross undervaluation is what they call a Glitch in the Matrix.

Another gem in the crown is the coming old car shredding business which MSTC is doing with Mahindra in equal JV. They have started the first plant in Noida and second plant is coming in Chennai soon. No doubt this is going to see huge growth and going to be the major value creator.

Further, analysts were shouting that MSTC is dependent upon government support to get the revenues from govt and other PSU organizations although they are dying to buy another Govt supported stock IRCTC. Although there is still nothing wrong in government providing the support to businesses because I have always felt that in some sectors it is better if government takes the initiative and put efforts in creating infrastructure and faith in the sector. Chinese state owned organizations have catapulted china into a Giant only on the basis of their efforts to create an environment of confidence and capability. Govt as a client helps these niche businesses to sharpen their skills and mend any loopholes. MSTC has created a highly capable and trustworthy infrastructure for B2B ecommerce by ensuring fair discovery of price and payment settlement eliminating all the third party risks. Due to trust factor, people still do not place orders at another big indian B2B startup Indiamart which is coming with an IPO and this may further establish the valuation benchmarks and rerating of MSTC.

But MSTC is already focusing on partnering  with private sector and recently has entered into deals with Reliance, L&T, Mittal energy for sale of their scrap at its platform and there is no doubt that scrap is just the start and in my view very soon the relationship will be expanded to cover e-procurement also. And due to this alone MSTC deserves big re-rating because it has demonstrated that it can attract Indian private sector giants to trade at its platform which is a big achievement for a PSU which is generally considered lethargic. Here, these private sector are not partnering with MSTC due to some government factor but the fact is for capturing the business from private sector MSTC is competing directly with other private sector B2B ecommerce firms.

MSTC is expanding the coverage of its B2b offerings and off late has covered agricultural produce, coal, govt land, minerals etc on its platform. Just lasy day it has entered into a tie up with Allahabad bank to auction the latter’s NPA on its ecommerce platform. This is indeed a very innovative product and this is going to motivate other banks also to come to its platform to ensure the fair and efficient settlement of NPAs. 

Farmers in our country are not suffering due to production issues but here our main pain point is the very inefficient supply chain where farmers get very low proportion of the final price. But this is not something which can't be solved. Just take the case of Dairy sector where due to supply chain revolution by co-operatives like GCMMF (Amul Milk) farmers get some 70-80% of the final milk price. This is a big revolution and needs to be replicated in agriculture produce also. This high share of farmer is the reason that MNC dairy giants like Danone are struggling to capture Indian market because in India dairy chains do not own large dairy farms keeping hundreds of animals. Here farmer is the producer and the relationship with the farmer in the form of milk sourcing tie up acts as a big entry barrier. It is very costly to run a dairy farm in India due to high land prices etc.

Similar innovation is required in agri produce supply chain also and this is one area about which i have already shared a lot in my earlier posts related to MCX/commodity trading. So in order to achieve the same MSTC has started auction and e-procurement of agri produce on its ecommerce platform (launched E-Rakam) where farmers and retailers/processors can trade and this has ensured good price discovery. At present, MSTC is working on solving the second aspect of this price discovery which is logistics support because someone has to do the role of aggregator and ensure the supply of agri produce to the buyers. MSTC is in touch with some innovative logistics startups and some airlines also. This is an area which is going to be big and why i think so because we have no choice otherwise our farmers will continue to reel under poverty and inefficiency and Government has to put (or waste) scarce and valuable resources to save the farmers. So this is an area where we urgently need to do something. Contract farming is another option to solve this mess and recently Tamil nadu government enacted a law in this regard and contract farming can save the farmers from the weird price moments and the inefficient supply chain.

In Agri produce auction and procurement at MSTC platform, i think various government agencies like NAFED and FCI can take the lead as this will motivate other private players to join and this will also increase the trust in the trading platform.

I have started buying this one from 115 and very soon going to put all my planned investment in this one. CMP is around 123 which is an excellent opportunity to enter and it is buy more at every fall type of stock. I have shared this small study as I feel that it is looking set for re-rating very soon and I will share my detailed study at some other time.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).

11 comments:

  1. Thank you for the good analysis . Can you pls advice on your old bet KIRAN VYAPAR which is also related to Farmers

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    1. Hi Dear, I am still holding Kiran but yet to make another visit to recheck the growth made in Navjyoti etc. Will try to do the same soon and will share here.Till then just hold it.

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  2. I always amazed to read your posts and most of your analysis are on the spot and cover the entire picture of the industry and opportunities which is in - thanks a lot for the wonderful posts - I never skipped your posts and my portfolio is full of a gems revealed by you - Thanks a lot for your analysis and reports Guru Garu

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  3. The fact to be considered is that faster and nimble players r coming who r taking market share from MSTC.

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  4. Thanks for your analysis, we have accumulated some shares( around 14000) at around RS.121-122. what price you are targeting in near future. We have good holding capacity and also can invest further. Regards

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    1. Hi Dear, as scope of scale is HUGE and it also deserves valuation re-rating so at market cap of mere 800-900 cr sky is the limit. But it is better to not to think of any target at this point in time as the sector is still in infancy and if MSTC can carry on its current pace of progress then it will be a story of life time....making of a blue chip stock.

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  5. great article and analysis. markets are giving valuations to irctc/info edge/

    amazon/flipkart in pvt equity space
    high time b2b models get good valuation
    udaan b2b valued at 2.8 billion in recent funding
    hope mstc will get 1 billion dollar ( 7000 crores) in next 2/3 years
    should be a multibagger stock idea in making
    thanks for this wonderful analysis Gurpreet

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  6. Indeed wonderful analysis..any target price sir

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    1. Hi Ashwin, As you can see the market cap is just 800 cr and B2B ecommerce is still an infancy and it has everything in it to prove itself as value added partner to the businesses in the form of ease, time savings and fair price and so there is nothing which could stall its forward march...the march will only gather pace from hereon. So now the thing we need to watch is how much of this pie can MSTC get and as per the progress made by it our target price will be settled. right now it is too early to take a call bcz if we can wait for the right time then this can be a future blue chip...

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