MULTI COMMODITY EXCHANGE OF INDIA LTD : RISING FROM ASHES !!!

Scrip Code: 534091 / MCX

CMP:  Rs. 529.50; Strongly Accumulate at every dips.

Medium to Long term Target – Rs. 800.00; STOP LOSS – Rs. 487.14; Market Cap: Rs. 2,700.36 Cr; 52 Week High/Low: Rs. 1536.05 / Rs. 238.15

Total Shares: 5,09,98,369 shares; Promoters : 1,32,59,575 shares –26.00 %; Total Public holding : 3,77,38,794 shares – 74.00 %; Book Value: Rs. 226.82; Face Value: Rs. 10.00; EPS: Rs. 47.00; Div: 240.00 % ; P/E: 11.26 times; Ind P/E: 33.35; EV/EBITDA: 7.46.

Total Debt: ZERO; Enterprise Value: Rs. 2,625.23 Cr.

Multi Commodity Exchange Of India Ltd: MCX was incorporated as a private limited company on April 19, 2002 in Mumbai, India. Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised Exchange has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operation for commodity futures across the country. MCX came with an IPO with a sale of 64,27,378 shares by its then shareholders with an objective to achieve the benefits of listings on the Stock Exchange. The IPO was priced at Rs. 1,032.00 per share raising Rs. 663 Cr and got listed on March 09, 2012. MCX holds a market share of over 86 % as on March 31, 2012 of the Indian commodity futures market. The Exchange has more than 2,710 registered members operating through over 3,46,000 including CTCL trading terminals spread over 1,577 cities and towns across India. MCX was the third largest commodity futures exchange in the world, in terms of the number of contracts traded in 2011. The exchange is the world's largest exchange in Silver and Gold, second largest in Natural Gas and the third largest in Crude Oil with respect to the number of futures contract traded. MCX was the first exchange in India to initiate evening sessions to synchronise with the trading hours of global exchanges in London, New York and other major international markets. It was the first exchange in India to offer futures trading in steel, crude oil, and almond. Among international alliances, MCX have formed strategic alliances with a number of exchanges such as the London Metal Exchange, the New York Mercantile Exchange, the LIFFE Administration and Management (under renewal), the Baltic Exchange Limited, Shanghai Futures Exchange and Taiwan Futures Exchange. MCX holds 5 % in Dubai Gold and Commodity Exchange and the book value of this investment was Rs. 2.185 Cr as of December 31, 2011; 100 % in MCX Clearing Corporation Ltd; 5 % in MCX SX; 26 % in MCX-SX Clearing Corporation Ltd; 51 % in SME Exchange of India Ltd with initial investment of Rs. 5,10,000. MCXIL is compared with Bombay Stock Exchange of India Ltd, National Stock Exchange of India Ltd, United Stock Exchange of India Ltd, Calcutta Stock Exchange , National Commodity and Derivatives Exchange, National Multi-Commodity Exchange of India Ltd, Financial Technologies (India) Ltd in India and Globally compared with Ichiyoshi Securities Co Ltd of Japan, Osaka Securities Exchange also from Japan, CME group, Intercontinental Exchange Inc, Nasdaq OMX Group/THE, CBOE Holdings Inc, London Stock Exchange Group, TMX Group Inc, Deutsche Boerse AG, Bolsas Y Mercados Espanoles, ASX Ltd, Singapore Exchange Ltd, Hong Kong Exchange & Clearing House Ltd, Bursa Malaysia BHD.
                                                

Investment Rationale:

Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodity futures exchange, with nearly monopolistic market share of around 90.50 % in commodity market in India. MCX enjoys a competitive edge, and has its own Economic Moat (A competitive advantage is, that one company has over the other companies in the same industry – by Warren Buffett) and is expanding its moats which is a very strong sign of as a future Multi-bagger given that its has an strong technology support for its trading platform supplied by its then promoter, Financial Technologies India (FTECH), which is a leading developer of exchange related software and technology in India. Technology for the exchange industry is difficult to replicate, and this provides the MCX as a company with a competitive advantage. Exchanges require constant technology upgrades and support, necessitated by regulatory regime and market forces. MCX is able to obtain speedy and efficient technology solutions from FTECH. MCX’s current technology infrastructure is sufficient to handle daily trading volumes of up to 10,000,000 in a day. Indian commodities exchanges are highly regulated, and the current regulatory environment, foreign institutional investors (FIIs), banks and mutual funds cannot trade on commodity exchanges. Growth potential in the economy like India's remains huge over the next decade, which is expected to drive the demand for commodities. The increase in physical market volumes consequently increases the hedging requirements for industry players, influencing derivative trading volumes. Penetration remains low - Globally, futures Gold volumes are 70-80x that of physical trade as against 17-18x in India, 20x in Crude as against 7x in India, 100x in Aluminum as against 8-9x in India. MCX has agreements with financial information service agencies to provide real time data-feed on trading prices, trading volume and other information on the Exchange and on the spot market. The company currently has such arrangements with the following entities: Bloomberg Finance L.P.; NewsWire 18 Private Limited; IQN Data Solutions Private Limited; Reuters India Private Limited; Interactive Data (Europe) Limited and TickerPlant Limited. 

 "In order to raise from its own Ashes 
                                                           A Phoenix First Must Burn "


                                                                                        - Octavia E Butler.

Just as the Phoenix bird raises from its ashes, MCX will also raise from the ashes. Recently, MCX stock prices faced extreme pressure in its prices on brouses and its prices went down from Rs. 1300 to Rs. 238 levels in months, due to Rs. 5,500 Cr National Spot Exchange Limited trade settlement scam. NSEL is a subsidiary of MCX’s parent company Financial Technology India Ltd, and as a promoter of MCX, after this scam, FTIL is forced to reduce their stake in MCX from 26 % to merely 2 % of paid up equity capital of MCX within the end of January 2014. The commodity regulator Forward Market Commission recently declared that Financial Technology, Jignesh Shah along with Joseph Messy, unfit as a promoter to run any exchanges in India due to NSEL Scam. From the reports of FMC Jignesh shah resigned from MCX as a Vice Chairman and also resigned as a shareholder director from the MCX. Last month of November 2013, the parent company sold its entire stake in Singapore Mercantile exchange to Intercontinental Exchange Group Inc for $ 150 million. The stake sale of 24 % would mean a additional pressure for a short time bring prices of MCX coming down, but since the change of guard of the company is huge positive and this will further strengthen the fundamentals of the company. MCX is a good business and it looks like its internal problems are getting sorted out, it is already being punished quite a lot. Also the fact remains that the impact of the securities transaction tax (STT) will probably going to impact MCX’s earnings, but still it’s a good long term opportunity. On 13 January 2014, MCX received approval of Institutional shareholders to raise funds through issue of shares in a form of rights issue to its existing 22 institutional shareholders of MCX-SX on basis of 1:1 at Rs. 10 per share on a proportionate basis. These domestic financial Institutional Investor includes IFCI, Union Bank of India and Punjab National Bank together holding 88.53 % of the undiluted shares. The process is expected to be completed by Mid-March. The exchange is expected to garner between Rs. 500 - Rs. 600 Cr through this issue. This rights issue will also result in the Financial Technologies group's effective stake in the exchange coming down from 70.9 % to 56.4 %, this is because most of its stake is held as a convertible warrants, for which no additional securities will be issued through the rights issue. MCX- SX's Net worth (Share capital + Reserves and Surplus) has come down from Rs. 274.6 Cr to Rs. 185.8 cr between March 2013 and September 2013. At this rate, the company's net worth could breach the stipulation of a minimum Net Worth of Rs. 100 Cr by SEBI. Apart from a successful rights issue, the exchange's net worth can also get boost if the FTIL group find takers for its warrants which are then converted into equity shares. Also MCX-SX have commenced trading in Interest Rate Futures (IRF) contracts in the currency derivatives segment from 20 january 2014.

Outlook and Valuation:

Multi Commodity exchange of India (MCX), India’s biggest commodity bourse, has an average daily turnover of about Rs. 240 billion or 77 % of the country’s exchange commodities volumes. MCX has its market leadership and has early mover advantage, edge in innovation with technology support from FTIL and is sticky liquidity. The exchange, with eight years of operating history and is in a growth phase with structural levers in place for an upward trajectory in volume over the long term. Until a new player poses a stiff competition or institutions are permitted to participate on CommEx, it is expected that MCX’s commission yields to stabilise. Comparing this company with its global peers, MCX valuations are at highly discounts with matured exchanges in developed nations and at 35 % ‐ 50 % discount to valuations of listed CommExes in developing markets. Currently CME Group Inc trades at a PE of 27.71x; Intercontinentale Exchange Group Inc trades at a PE of 29.48x; NASDAQ OMX Group Inc trades at a PE of 20.75x; CBOE Holdings Inc trades at a PE of 27.49x; MarketAxess Holdings trades at a PE of 34.27x; NYSE Euronext trades at a PE of 21.91x and MCX trades at 9 times.. Hence this discount is temporary in nature due to problems faced by its parent company and requlatory issues, and once these issues are solved these discounts will get narrowed down. Adding that there are possibilities of opening of option trading or participation by FIIs, MFs, Banks etc and possibilities of revision invariable fee structure for technology cost sharing with FTIL and also cannot rule out the possibilities of scale up in valuation of MCX-SX upside. It is expected that, MCX will sustain its market leadership which is steamed up from its technological edge and future readiness. MCX's volumes have grown at a CAGR of 47 % over FY07-FY12. Future potential remains exciting given the likelihood of new products and participants with the FCRA Bill, with its 20 lakhs client accounts as compared with 1.9 Cr – 2 CR Demat accounts, the industry has only scratched the surface with respect to potential volumes. MCX, with its technology as a backbone and readiness to latch on to new opportunities and also with the policy to maintain 50 % payout ratio is a key valuation positive. The valuation of MCX’s standalone business at 20x FY15E EPS of Rs. 37.60 gives us the standalone valuation of MCX at Rs. 752 per share; the valuation of the stake in MCX-SX (incl. warrants) contributes additional Rs. 110 per share to MCX. It is expected that MCX to have volumes growth of 15 % CAGR over FY12-15 and a PAT CAGR of 13 % over this period. Also, the ROE should sustain its level in the high 20's.  In my view MCX could report FY14E EPS of Rs. 66.50/share and for FY 15E of Rs. 76.50/share. The stock should go to the price of Rs. 862.00, and conservatively keeping the target of Rs. 800 and recommend to Accumulate on the stock at every dips.

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	526.20	493.50	339.10	361.00
NET PROFIT (₹ Cr)	286.20	280.00	168.80	191.80
EPS (₹)	56.10	54.90	33.10	37.60
PE (x)	24.90	12.60	21.00	18.40
P/BV (x)	7.20	3.10	2.90	2.70
EV/EBITDA (x)	17.70	8.20	14.20	12.80
ROE (%)	31.00	26.00	14.20	15.10
ROCE (%)	24.80	24.80	13.60	14.60

I would buy MCX for Medium to Long term for target of Rs. 800. 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 ₹ 487.14 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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