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Multi Commodity Exchange of India Ltd – IPO Note

 

 

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Company Background

 

Incorporated in the year 2003, Multi Commodity Exchange of India Ltd (MCX) is electronic commodity futures exchange, which provides online trading facility along with clearing and settlement operations for commodity futures across India. MCX has emerged as the market leader in India’s commodities future industry with around 88% market share as on 30th September, 2011. As on 31st December 2011, it had 2,153 registered members nationwide with more than 296,000 terminals across India and has emerged as the 5th largest commodity futures exchange in the world as per Futures Industry Association (FIA) survey.

Peers

 

In domestic market are National Commodity and Derivative Exchanges Ltd (NCDEX), National Multi Commodity Exchange of India Ltd (NMCE), Indian Commodity Exchange Ltd (ICEX) and ACE Derivatives and Commodity Exchange Ltd (ACE). In international market, the peers are Shanghai Futures Exchange, CME Group (includes CBOT and NYMEX), Zhengzhou Commodity Exchange, etc.

MCX market share against its peers (percentage) in domestic market

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Source: RHP, MCX

 

 

MCX allows trading in more than 50 commodities across sectors like bullion, metals, energy and agricultural products. In the world, MCX is the largest silver exchange, the second largest in gold, copper and natural gas and third largest in crude oil futures based on the number of futures contracts traded as on 30th June 2011.

 

 

Share in revenue of major commodities as on FY11

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Source: RHP, MCX

IPO details

MCX is offering 6.4 million equity shares at a price band of Rs 860 to Rs 1,032 through an offer for sale. The key shareholders who are reducing their stakes are Financial Technologies (India) Ltd (FTIL), State Bank of India (SBI), GLG Financials Fund (GLG), Alexandra Mauritius Ltd (AML), Corporation Bank, ICICI Lombard General Insurance Company and Bank of Baroda. Through this IPO, 2.6 mn shares are offered by FTIL, 2.1 mn shares are offered by SBI, 0.78 mn by GLG, 0.39 mn by AML, 0.24 mn by Corporation Bank, 0.14 mn by ICICI Lombard and 0.1 mn Bank of Baroda. Subsequent to IPO, FTIL’s stake in MCX will reduce to 26% from around 44% they owned earlier. The issue is worth Rs 552 – Rs 663 crore. However, the company will not receive any proceeds from this offer.

IPO Grading

Credit rating agency, CRISIL has assigned 5/5 grade to the IPO of MCX which indicates strong fundamentals. However, this grade is not an opinion on whether the issue price is appropriate to the issue fundamentals. Also, it’s not a recommendation to buy, sell or hold this graded instrument.

Revenue Mix

The company originates its income from transaction fees with respect to the trades executed on their exchange, annual subscription fees, membership admission fees, terminal charges, proceeds of sale and dividend / interest income from investments.

Break-up of revenue mix

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Strengths

§ Leadership position in the commodity futures industry.

§ To launch new products at regular intervals, retain existing investors and attract new investors for trading in futures market.

§ Technology infrastructure is a key factor of growth for this company and highly scalable business model.

§ Experienced Management team / board of directors to cruise the business, by adapting to newer changes in the regulatory environment and bring innovations to exchange.

Business strategy to grow in future

§ Intends to grow its market presence in new regions across India and to increase number of its participants.

§ Enhance marketing, educational and promote awareness of trading in futures industry among participants in related industries.

§ Continue to pursue strategic initiatives to open up new revenue streams. The company is looking for opportunities to invest in companies or assets in related industries, primarily in India and the pan-Asian region, which would enhance its growth, operations and profitability.

Risk factors

§ Unable to grow the turnover of commodity futures traded on exchange could affect the business.

§ Growing competition from existing players and new entrants in the industry.

§ Maximum income is derived from futures trading of some commodities on exchange. So, decline in trading volume of these commodities could affect the flow of income.

§ Failure to amend Forward Contracts Regulation Act, 1952 (FCRA) in timely manner. If this measures are not brought into force in a timely manner, and its inability to introduce new products on the exchange could have adverse affect on its operation.

§ Imposing Commodities Transaction Tax (CTT) by government could decline volumes of future trading on exchange.

Financial Analysis and Valuation

MCX has reported robust growth over past 3 years. Operating income has growth at a CAGR of 32%, EBITDA at ~31% and adjusted PAT at ~30% between FY09-11. In medium term, the company’s strong market position and continuous focus on product innovation would act as growth drivers. In long term, introduction of new instruments such as options trading on exchange and active participation by institutional players, after necessary regulatory reforms take place, are likely to drive growth in income.

Financial Summary

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As on December 2012, the company registered total income of ~Rs 474 crore and net profit of ~Rs 220 crore. Since, the company has the price band of the IPO at Rs 860 – Rs 1032 it pegs the valuation of the bourse at Rs 5263 crore (around $1 billion) at the upper end of the price band. On basis of earnings multiple, the upper end of the price band puts MCX slightly on the expensive side i.e. 30 times its earnings of FY11, while it would be 25 times on the lower end of the price band. However, IPO of MCX is first of its kind stock in the market with no close peer for valuation to compare and riding on India’s potential for rapid growth in commodity trading.

Conclusion

The pricing of this IPO is attractive based on valuation and growth prospects. It’s recommended to “Subscribe” for this issue considering MCX’s leadership position in commodity exchange markets, operating profits around 60% from last two financial years and debt free balance sheet.

 

Author

 

Hiral Thanawala

Published Feb 20 2012

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