MSTC Ltd shares might have rallied 282 per cent from 52-week low of Rs 239.65 hit last year in March 2023, the rally could not stop brokerage Monarch Networth Capital from suggesting a 101 per cent upside target on the Mini Ratna PSU name. Monarch said vehicle scrappage business holds immense potential and that MSTC's fundamentals are strong with legacy issues behind it.
Monarch said its back of the envelop exercise indicates an upside of 70-130 per cent for MSTC over the next 2-3 years. "Over 2005-2008, around 7.2 million vehicles were sold in India, as per Statista. Assuming (i) around 30 per cent of these would be available for scrappage, (ii) average vehicle price (passenger and commercial) of Rs 4 lakhs, (iii) 30 per cent recovery from scraps, (iv) JV’s market share of 10 per cent, (v) JV’s PAT margin of 20 per cent, and (vi) MSTC’s core business to remain stable, we get a potential net income of Rs 810 crore for MSTC, which seems attainable by FY26," it said.
This, Monarch said, indicates a forward P/E of 7.5 times. Applying a target PE of 15 times, a pro-forma fair value is Rs 1,726, which implies an upside of 101 per cent from current levels. Check valuation table the end of the article.
MSTC is majorly owned by the central government and has an excellent track record of successfully conducting fair auctions for government bodies in India, Monarch said. The gross merchandise value (GMV) traded through its online marketplace grew at a 5-year CAGR of 33 per cent to Rs 3,01,500 crore in FY23. The company’s commission earned of just 0.120 per cent on its GMV for FY23 is so low that by itself it creates an entry barrier for competition, the brokerage noted.
"MSTC has almost downsized its goods trading business where it suffered significant impairment in its receivables from private sector clients. As a result, its trade receivables are now down by 80 per cent in FY23 over FY19. As of September 2023, MSTC was net cash (133 per cent of trailing equity and 20 per cent of trailing market cap) helped mainly by the security deposits (14 per cent of trailing market cap) from interested buyers in the auctions. It has been earning an ROE and ROCE of 25 per cent+ over the last 2 years with likely no material reduction going forward," it said.
Add to that, Monarch said the government is looking to divest MSTC’s 100 per cent subsidiary, Ferro Scrap Nigam Limited, which contributed 15 per cent to consolidated net income for FY23 and earned a PAT margin of 10 per cent on an asset size of Rs 440 crore.
"While the timeline for this divestment is not clear, the cash flow may ultimately be paid out as a dividend or redeployed in the business for growth, both of which would be a favourable outcome," it said. On Tuesday, shares of MSTC were trading 7.15 per cent higher at Rs 920.40 on BSE.
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