SG Mart

A Large B2B Marketplace in making, in India

Background

SG Mart is a new venture from the house of APL Apollo; they want to make SG Mart as the biggest trading company in India in the B2B space. Their core business is Steel Tubes and Pipes (plumbing) and they have themselves gone through challenges of pushing their materials through large distributors; on a side note, this is also one of the reasons they started SG FinServ which is aimed at solving working capital / retail finance needs of distributors and SMEs in India. Thoughtful and hands-on promoters who are trying to encircle around their Core Competency of manufacturing and trading and entering the associated businesses as adjacencies now.

Vision

A general B2B marketplace that they have thought of is Metal, Non-Metal, Agri Commodities, Construction Material, Equipment, Derivatives and Cement. They want to start in Steel as this is the business that they have known for 4+ decades (Core Competency). SG Mart has been funded by Apollo Group (350 cr) and Havells and others (800-900 Cr); that speaks about the Skin in the Game of promoters as well as major supplier like Havells.

The plan is to capture 8-10% of the opportunity size of India’s ~4 lac Cr market to make 50K Cr Topline by 2030.

Why Now

• China+1 opportunities in manufacturing; last 5 years no meaningful upstream steel capacity addition has happened, industry can see a good runaway of demand -between Dec 23-25, India will be adding 50% of Steel Capacity – manufacturers will need large channels to push the sales in the market

• Large distributor houses in India are missing (likes of China, Japan and South Korea- Sumitomo, Mitsui etc)

• The possibility of cutting down logistics costs through the Hub-Spoke model & GST is now possible, which gives some additional margin and scope for running marketplaces

Three revenue streams in Steel

1.     B2B - Trading of Long & Flat Steel products, buy and distribute for large players like JSW, JSPL, NMDC, SAIL & APL APollo themselves

a.     Largest Steel trader does 25K T/ month; they did 50K Ton/ month recently

b.     Entered Zinc as commodity and already become largest Zinc trader in India

2.     B2B – Create a large network of Service Centres, where they can process upstream steel into semi-finish products, and supply to small intermediates

a.     Auto, Consumer Goods industries are buying semi finish products from Mom & Pop stores; there is no large, organised player who can ensure quality and service

b.     These service centres will be in Industrial clusters like Raipur, Patna, Ludhiana, Kochi etc – plan is to add 100 by 2030 - good GTM

c.     Every service centre requires 25 odd Cr in Capex + 10 Cr in WC

3.     B2C - Steel Rebars and light structures sold as Brands; through the existing Apollo distribution network. Their existing dealers do 20-30% of business from Apollo and the rest of the 70-80% comes from non-tube products (welding rods, channel, rebars etc) which are bought from small manufacturers – which is a highly unorganised industry, can be formalised like Tubes. They will be using the Apollo brand name (Free of Charge) for the private labelling of these products

Right To Win

First Large Established player which has its own distribution network and know-how + relationships with large players as they are buying on Credit (Contractual Purchases) and selling it on cash- giving 0-10 days of working cycle (Super!) + Money Power to rotate huge capital as it is a trading business & to fund Capex of B2B Service Centres

Profitability

1.     B2B trading business - Low margin (1.5-2%) with a high rate of churn 15-20 a year, will give 25-30% RoCE

2.     B2B Service Centre – 2 are opened and clocked 10-12K per month volume, 2 will be starting and 1 will be in Dubai – total 5 will contribute 30K-40K per month at 4-5% margin with 15-20 days of inventory: 30-35% RoCE behind every center @5k Tons volumes per month

3.     B2C trading business, aggregating between small manufacturers and small traders (existing Apollo dealers); already done 30K Ton per month, at a blended 2.5% margin with 15-20 days of working capital. B2B service centres will act as warehouses for this segment, so no extra expenditure on storage and supply chain

Valuations

Taking all the growth prospects and going by the promoter`s guidance in the Q1 call-

*PAT in 2024, is higher than EBIDTA because of other income of 30 Cr (FD interest)

Assumed No Debt and Interest Cost as they have 1200 Cr + cash available and rest they are going to fund through YoY incremental profits.

So, a business with 50K topline and roughly 900 Cr PAT and 30%+ RoCE should trade at PE of 20- 25 (excluding the non-steel business growth factor which is not considered in the calculations above) = giving a Mcap of 18-22K Cr, currently, it is at ~5K Cr Mcap; giving a potential upside of ~4X from current prices

The stock has gone up 10-15X and currently trading at 55 PE on a TTM basis, definitely not optically cheap as well has less margin of safety.

Risk & Possible Mitigations -

• Very high & tall revenue guidance

  • Although established promoters with good past backgrounds, and superior business models like SG Finserv, need to watch out on a QoQ basis

  • Steel prices vary as a commodity, which can impact the thin margins

  • SG mart has low inventory days of 0-10 days, should be able to pass on RM increase

• Risk of defaults, late payments by buyers (distributors)

  • Channel financing provided by SG Finserv, also majorly cash- carry business model envisioned right now

  • Their competitor – Sankara has stable 2.5-3.5% margins with 40-50 inventory days and almost no write-offs

• EBITDA margins flowing as is into PBT (no interest cost)

  • Equity-funded Capex, and later from internal accruals, doesn’t look like a problem till they start taking debt (and change the plan)

• Acquisition and Retentions of customers (small distributors) ; OEMs directly doing business with small traders/ distributors and skipping SG in-between

  • Possible Benefits of Economies of Scale through High Purchasing Power over OEMs => leading to better margins =>  passed on in terms of better prices in future - No other possible good answer that I could derive from con-call

What I liked –

• Established promoters with good track records; investor-friendly

• Repeated comments on RoCE & Business Models – Capital Allocation focussed

• Huge Optionality in Revenue through Non-Steel business like Construction materials, Electricals etc

• Possibly they will end up scaling the business with low debt

Sources

https://www.screener.in/company/512329/

Q1FY25 Con Call Transcript

Q1FY25 Quarterly Results Presentation

FY24 Annual Report

DISCLAIMER: I AM NOT A SEBI REGISTERED ADVISOR OR A FINANCIAL ADVISER. ALL THE VIEWS ARE FOR EDUCATIONAL PURPOSES. I MAY OR MAY NOT HAVE INVESTED IN THESE STOCKS. PLEASE DO YOUR DUE DILIGENCE YOURSELF. THIS IS NOT A STOCK RECOMMENDATION.