MSTC share price takes off: India's recycling champion soars 90% in a month

India produces about 55 million tonnes of Municipal Solid Waste (MSW) yearly, expected to rise to 125 million tonnes by 2031. However, only a fraction of this waste is collected and processed, highlighting the need for improved recycling practices.

Within the recycling landscape, the End-of-Life Vehicles (ELVs) sector also gains importance, stimulated by the government's 2021 scrappage policy.

This policy, which mandates fitness tests for older vehicles, is creating a substantial source of scrap metal and opening opportunities for investment in recycling enterprises.

Commercial vehicles over 10 years and private passenger vehicles over 15 years that fail the test will be deregistered and scrapped.

This offers an excellent chance for investors to capitalise on companies contributing to the country's recycling economy.

And what could be more fitting than MSTC, a long-standing government-owned entity with decades of experience in the recycling industry?

MSTC: A trusted force in India's recycling revolution

MSTC, a government-owned entity, is not your average recycling company. Since its inception in 1964, MSTC has evolved from a scrap export regulator to a major player in e-commerce services and raw material trading.

The company operates primarily in e-commerce and trading/marketing, offering diverse services across various commodities and assets. MSTC's e-commerce platform boasts over 150,000 global clients, leveraging cutting-edge IT infrastructure to provide secure and transparent services.

MSTC operates in two primary business segments: e-commerce and trading/marketing.

The company is responsible for introducing e-commerce in various commodities such as scrap, coal, iron ore, minerals, farm/forest produces, properties, fly-ash etc.

Apart from this, MSTC has also undertaken the e-auction of land, buildings, apartment, banks’ NPAs and organic Agri produce etc.

It has been acting as the selling agent of a large number of government departments/PSUs for disposal of scrap, surplus stores, old plant & machinery, e-waste, hazardous items, obsolete items, etc.

Over time, MSTC has expanded its e-commerce portfolio significantly, diversifying its business.

The company has diversified to include a broader range of assets such as telecom spectrums, non-performing assets for banks, liquor licences, sand blocks, and more.

As a conscious effort, the company has been reducing its exposure to the unprofitable and volatile trading business.

The company's proven track record in providing an e-auction platform across diverse industries serves as a significant competitive advantage, with high entry barriers to the industry.

The winning strategies

With auctions emerging as the preferred method for the government's sale or purchase of contracts, MSTC's established presence and strong track record of handling diverse assets, give it an edge.

MSTC's strategy involves diversifying its business to reduce exposure to volatile trading sectors. The company's in-house java team develops custom e-commerce solutions for a range of auctions, including spectrum sales and coal block auctions.

Additionally, MSTC is focusing on the vehicle recycling business in collaboration with Mahindra MSTC Recycling Private Limited (MMRPL), highlighting environmentally sustainable practices for ELVs and white goods recycling.

Through MMRPL, ELVs are acquired for de-pollution, dismantling, and the transformation of metallic components into bales, aligning with environmentally sustainable practices.

MMRPL has expanded its operations to many cities in the last few years, in line with the anticipated growth from the new scrappage policy.

The joint venture works with OEMs to enhance the implementation of materials which are environment friendly and can be recycled well.

It has positioned itself in multiple ways in the entire recycling value chain, operating in three key areas: catalysing the circular economy through scrap auctions, establishing a nationwide presence in vehicle recycling via its joint venture, and serving as a bridge between stakeholders and ministries to contribute insights for policy development and ecosystem facilitation.

With around 46 million end-of-life vehicles on Indian roads, MSTC is actively developing the necessary technology to manage this scale.

Looking ahead the company aims to expand its operations spanning 40 cities to 100 cities by 2025.

Uphill battle

Despite its potential, MSTC's vehicle recycling business faces challenges, including the need for a supportive ecosystem and the capital-intensive nature of vehicle scrapping.

In a recent call with the company, the management admitted that they are working with the government to create a conducive ecosystem for the vehicle recycling business.

Although the company did not outline clear guidelines, they did imply that creating the numerous elements within the ecosystem will require some time due to its complex nature.

Government policies and the growing awareness of recycling present formidable opportunities for organized players in this industry.

At present, the JV is operating at a loss. It reported a ₹34 million loss in the first half of FY24.

Key risks

A large chunk of the business volume comes from commodities like coal, metal, chemicals etc. which are inherently volatile and are cyclical by nature.

This brings fluctuation in the overall volume of the company. However, MSTC has been addressing this by diversifying its revenue sources.

The company requires high working capital for running business due to high debtor period (recoveries pending from government authorities).

In the past also, debtor’s days was high primarily on account of debtors from trading operations which the company has reduced substantially over time.

The elevated debtor days can be a cause for concern. Generally, extended debtor days imply the company is waiting longer to collect payments from its customers.

This delay in cash collection can lead to liquidity issues, affecting the company's ability to meet its short-term financial obligations, pay suppliers or invest in growth opportunities.

Business Performance

Between 2019-2023, the business has performed admirably.

While sales have dwindled, as a conscious effort to clam down the company’s unprofitable and volatile trading business, the net profit have grown at a CAGR of 25% over the last five years.

Previously, the company faced losses due to significant provisions for unpaid trade receivables. It has since revised its policy and now conducts business with customers willing to procure products backed by a 110% bank guarantee.

The returns have been strong, with the Return on Equity and Return on Capital Employed averaging at 11.2% and 19.6% over a five-year period.

The company boasts a healthy balance sheet, which allows it to reward its shareholders with hefty dividend payments.

The 5-years average dividend yield stands at a commendable 3.2%.

MSTC stock performance

MSTC has been a huge wealth creator in the past month. From ₹512 in December 2023, the stock is now trading at ₹932, clocking in a whopping 82% return.

In the past year, the stock price moved up sharply, from ₹310 in January 2023 to ₹932.

While the company’s quarterly performance has been stable, a large part of the surge in the stock price comes from exposure to the lucrative vehicle scrapping business.

At present, the stock is trading at a price-to-earnings ratio of 28.8 times, a 2.5 times premium to its 5-year median PE of 11.4 times.

Conclusion

With its expertise in the recycling sector, strategic diversification, and a proven track record of successful transformation, MSTC is well-positioned to ride the next leg of growth.

For investors seeking exposure to high-growth sectors, MSTC deserves a closer look.

However, the recent run-up in the stock price indicates that investors may have already factored in the bright outlook, possibly limiting the upside in the stock price in the near term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com