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Saturday, February 23, 2013

FINANCIAL TECHNOLOGY:UNLOCKING VALUES !!!


Scrip Code: 526881 FINANTECH
CMP:  Rs. 929.95; Buy at every dips.
Medium to Long term Target: Rs. 1130.40; 
STOP LOSS – Rs. 855.55; Market Cap: Rs. 4,285.07 Cr; 52 Week High/Low: Rs. 1221.90 / Rs. 551.55
Total Shares: 4,60,78,537 shares; Promoters : 2,10,42,582 shares –45.67 %; Total Public holding : 2,50,35,955 shares – 54.33 %; Book Value: Rs. 532.75; Face Value: Rs. 2.00; EPS: Rs. 112.37; Div: 400 % ; P/E: 8.27 times; Ind. P/E: 21.00; EV/EBITDA: 5.75.
Total Debt: 562.72 Cr; Enterprise Value: Rs. 4,191.79 Cr.

FINANCIAL TECHNOLOGIES (INDIA) LIMITED: Financial Technologies was incorporated in 1988 and is based in Mumbai, India. The company was earlier known as e-Xchange on the Net, in Aug 2001 the company changed its name to Financial Technologies India Ltd. Financial Technologies (India) Limited provides technology solution, intellectual property and domain expertise for digital transaction and financial markets across all asset classes including equities, commodities, currencies and bonds. It has set up 8 exchange ventures and 6 ecosystems venture – MCX, MCX-SX, IEX, DGCX (DUBAI), GBOT Mauritius, IBS FOREX, NSEL and SNX are all exchange ventures, while NBHC, Ticker Plant, Infovending, Atom technologies, Riskrat Consulting, FT Knowledge Management Company (FTME) are ecosystem ventures. It provides exchange, brokerage, messaging, consulting, and connectivity solutions. The company’s exchange and trading technology platform creates electronic, organized, and regulated financial markets for the asset classes and investor classes. The company offers comprehensive end-to-end solutions for the securities industry vertical encompassing the entire trade lifecycle of pre-trade, trade and post trade processing. In Brokerage Solutions its main product is ODIN. During March 2012, the company’s exchange technology (ET) division deployed energy solution Power Automated Risk & Matching System (PowerARMS) to enable trading risk management and clearing & settlement for Day Ahead Market at the Indian Energy Exchange. Financial Technology India Ltd is compared with Bursa Malaysia Berhad of Malaysia & Daiichi Commodities Company Limited of Japan.  

Investment Rationale:
Financial Technologies (India) Limited (FINANTECH) is the flagship company of the Financial Technologies Group co-promoted by Jignesh Shah an electronic & telecommunications engineer from Kandivali a small suburb of Mumbai who was the man behind the creation of Dubai Gold and Commodities Exchange and Singapore Mercantile Exchange, he started his career with BSE in its Rs. 100 Cr ambitious project to built BOLTFINANTECH set out by introducing India's first derivatives trading platform, with the launch of ODIN in 1995, which enjoys 80% market share. It powers the Group's exchanges with its technology, and has demonstrated ample expertise in creating robust solutions for exchanges across asset classes and geographies. FINANTECH is one of the leading software and technology providers to institutional investors and their related counterparts. Its technology vertical is sub-divided into four solution suites: (1) Exchange Solutions, (2) Brokerage Solutions, (3) Messaging Solutions, and (4) Consulting Solutions. FINANTECH has graduated from technology to Exchanges to Ecosystem, it ventured into a Regulated business and obtained license by multiple regulators and has become a Market leader across ventures. FINANTECH further integrated by setting up its own exchange - Multi Commodity Exchange (MCX) a state-of-the-art electronic commodity futures exchange, offering futures trading in 47 commodities. FINANTECH further promoted MCX-SX India's third full-fledged Equity stock exchange which was recently launched by the present finance minister Mr.P. Chidambaram on 9th Feb 2013. Like BSE and NSE, it has now from 11th February 2013 started offering trading in equities, equity derivatives and other asset classes. Currently, MCX-SX index is named SX-40 comprising 40 diversified stocks & offers trading in equity cash & futures contracts & in bonds etc. MCX -SX has 1,116 companies listed on it as compared to 1,662 on the NSE & 5,195 on BSE, with around 700 member out of which 405 members have received approvals from SEBI rest to follow soon. Its international exchange ventures - Singapore Mercantile Exchange (SMX), Global Board of Trade (GBOT) and Bahrain Financial Exchange (BFX) - are relatively new and still in investment mode, growing on a low base in their respective regions. Its newest exchange venture, Bourse Africa, is all set to commence operations. It will be Africa's first commodities spot and multi-asset derivatives exchange, equipped with a central counter party (CCP) clearing house and depository platform. FINANTECH four ecosystem ventures, which together addresses upstream and downstream opportunities in the financial market which are - National Bulk Handling Corporation (NBHC); Atom; TickerPlant; Financial Technologies Knowledge Management Company (FTKMC) a leading provider of solutions and services in the realm of financial sector knowledge. It offers numerous products and services in the areas of executive education, financial literacy, financial certification, research, consultancy and advisory.

Outlook and Valuation:
FINANTECH is a unique play on end-to-end presence in the ecosystem of stock exchanges and provides technology solutions for the financial markets. With the start of MCX –SX the 132 years of legacy of BSE - Asia's oldest stock exchange with 1,405 brokers & the out performance of NSE which was started in 1992 is being challenged. NSE being a relatively new entity by then was more receptive to innovation. NSE quickly realized the importance of IT and innovative products to meet the growing sophistication of the financial markets. NSE raced ahead to rule market share charts. Due to technology expertise of FINANTECH which gives the company a strong economic moat. An Economic Moat protects a company's profits from being attacked by a combination of multiple business forces. Exchanges globally have been enjoying the status of winner takes all businesses, with minimal competition. Financial Technologies forward integration ranges from trading platform to exchanges to complementary ecosystem ventures facilitate a distinctive value proposition to its customers, these cannot be easily replicated in the market and hence FINANTECH enjoys a healthy competitive advantage and sustainable profitability and which provides it Economic Moat to the company. Technology is the key requirement for an exchange hence FINANTECH is the technology supplier for all its exchanges, except Dubai Gold Commodity Exchange. Exchanges are largely a network business. The network effect lends sustainability to the business model and acts as an entry barrier. The first mover clearly holds the edge in such a scenario. The SOTP valuation of FINANTECH's comes at Rs. 1,413.12 per share and applying a holding company discount of 20% to the entities wherein FINANTECH is holding a majority stake and /or will go ahead and unlock value through sale of stake in the future comes the target price for FINANTECH at Rs.1,130.40, which implies 21.55% upside to the valuation. There are some potential triggers in the near term that could drive the valuations of the stock higher which are the Passage of FCRA bill - which allows trading of new products like options, indices on MCX, driving volumes and valuation for MCX, and consequently, FINANTECH, the Stake sale in IEX (from 33% to 26%) - which would help value unlocking in the same and the Volumes performance at MCX-SX post launch on February 9th, the valuation of which will get embedded in FINANTECH's price. At the Cmp of Rs. 929.95 the stock trades at 20.26 x P/E on estimated EPS of Rs. 45.90 for FY13E and 19.74 x the P/E on estimated EPS of Rs. 47.10 for FY14E. One can buy FINANTECH with at target price of Rs. 1130 for medium to long term .
SOTP Valuation :-

Business Subsidiary FY13E
Value Per Share (in Rs.) 
FINANTECH Standalone
543.00
MCX
341.12
MCX-SX
245.00
IEX
91.00
NSEL
106.00
SMX
61.00
OTHER INVESTMENTS
26.00
TOTAL
1413.12
Disc. to Holding co.(ex. FTECH stand.%)
20.00 %
TOTAL
1130.40

KEY FINANCIALS
FY12
FY13E
FY14E
FY15E
SALES (Rs. Crs)
425.50
390.90
482.50
533.40
NET PROFIT (Rs. Crs) 
490.90
211.50
216.80
250.30
EPS (Rs.)
106.50
45.90
47.10
54.30
PE (x)
10.10
23.50
22.90
19.80
P/BV (x)
2.00
1.90
1.80
1.70
EV/EBITDA (x)
20.20
22.30
15.50
13.40
ROE (%)
21.70
8.30
8.00
8.60
ROCE (%)
6.00
5.30
5.40
7.30

I would buy FINANCIAL TECHNOLOGIES LTD with a price target of Rs. 1130.40 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 855.55 on every purchase. 

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