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Tuesday, January 13, 2015


Scrip Code: 534091 MCX
CMP:  Rs. 860.20; Market Cap: Rs. 4,387.0 Cr; 52 Week High/Low: Rs. 926.80 / Rs. 457.95; Total Shares: 5,09,98,369 shares; Promoters : Not Defined – 00.00 %; Total Public holding 5 % or more : 76,49,755 shares – 15.00 %; Total Public holding: 2,62,34,571 shares – 51.44 %; Public holding : 28,77,641 shares – 9.92 %Book Value: Rs. 268.41; Face Value: Rs. 10.00; EPS: Rs. 23.21; Dividend: 240.00 % ; P/E: 37.06 times; Ind P/E: 31.26; EV/EBITDA: 22.21.
Total Debt: ZERO; Enterprise Value: Rs.4,334.01 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.  The company 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 CY2011. 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:
MCX is the market leader by trading turnover in the Indian commodity exchange space. Within the commodity basket, MCX focuses on non-agricultural commodities such as precious metals, base metals, and energy with the top four, gold, silver, copper, and crude oil, accounting for 90.9 % of volumes. In these four products, MCX almost defines the market. MCX also has 5 % direct stake in MCX-SX, a stock exchange and a further 32 % stake through warrants. In August 2014 Financial Technologies India Limited (FTIL) exited commodity exchange MCX by selling its entire 26 % in the bourse, it had originally promoted. Also there is no overlap between FTIL and MCX boards as Forward Market Commission had declared FTIL unfit and improper this rule of fit and proper criterion is that any shareholder who has more than 2 % stake in a commodity exchange has to prove them self-fit and proper to run the exchange. There are 1000 brokers in common to NSEL and MCX, and there is no direct cross liability and nor are any of their high volume brokers in distressed and also no distress has been reported on BSE/NSE either. MCX management soon realised that the need of the hour is to raise the corporate governance standards and to achieve this; MCX management took some major steps like making an experts & professionals as important appointments in key positions like CFO and Company Secretary. These measures were to increase transparency in operations of MCX as well as investor interactions after the NSEL Crisis. This also brought a transitioning in MCX from proprietor driven culture to a professional culture. Further, the FCRA bill which allows introduction of commodity options, commodity indices and Institutional participation in commodity exchanges is awaiting the parliament approval and looking at the MCX’s strong positioning, MCX would be benefited with most and it will enable MCX to quickly launch new product portfolio. These regulatory approvals could act as growth driver for volumes and subsequently MCX will be benefited. Recently, Commodity markets regulator Forward Markets Commission (FMC) on December 23, 2014 allowed Multi Commodity Exchange to launch Crude oil mini futures contracts for next year. The crude oil mini futures contract will have a trading unit of 10 barrel & will be quoted ex-Mumbai price. The lot size of crude is of 100 barrels (1 barrel= 159 litres) and for mini it is 10 barrel. An individual client can trade up to 4,80,000 barrels, while a member the brokerage firm collectively for all clients can trade up to 24,00,000 barrels, as per the contract specification approved by the regulator. The Current minimum trade unit in Crude oil is 100 barrels (Rs. 3.6 lakhs) now the New Crude Mini will have 10 barrels (Rs. 36,000) in lot size. Both will have the margin of 5 %. Globally options accounts for 17 % to 25 % of the total transaction volumes in commodities and introduction of options and indices at MCX could act as substantial volume booster for the exchange. This newly launched Crude mini contracts gained traction with registering a turnover of Rs. 1,488 Cr in just four days from its launch, the open interest i.e the total number of outstanding contracts that are held by market participants has also been high at 10,000 lots per day. The sudden fall in crude oil has led many small & medium  enterprises hedge their exposure on MCX platform. This mini contract attracted trading interest from small glass manufacturing, heat treatment & Plastic processing companies, these comapnies consumes large quantity of products derived from crude oil. Also the price risk associated with large number of crude oil derivatives such as bitumen, furnace oil, asphalt, naptha is in sync with the crude oil prices. Small industries which are these byproducts can use the new contract to hedge their risk effectively as done by SMEs in mini contacts. Further MCX is likely to introduce new products like Real estate indices, Rain indices etc. which could act as growth drivers. Forward Commission Regulator Act bill clearance would also allow banks, institutions and FII’s to participate in commodity trading which will further boost the turnover of the exchange turnover. MCX earns Interest Income from the Margin money of the clients and this is recurring revenue stream. MCX currently has over Rs. 600 Crs of cash and bank balances and does not have any debt on its balance sheet as on Mar 2014, and traditionally Exchange businesses are very profitable business which is very scalable with very little incremental costs thus ensuring that ROEs and ROCE in this business remains quite strong. Post the NSEL crisis the government reacted fast to ensure that the exchange working was not halted, the government appointed few dignitaries which boosted confidence and credibility levels for MCX and this helped MCX to improve its substantially. Hence the major dust is now settled down for MCX and with the triggers like introduction of new products, and the FCRA bill will help to re-rate the MCX stock, and this can be evident by the latest acquisition of MCX shares by Ace Investors like Radhakishan Damani, Rakesh Jhunjhunwala who picked up 2 % each in MCX at Rs. 660 per share & Kotak Mahindra bank picking up 15 % stake at Rs. 660 amounting to Rs. 459 Cr. On the financials side there can be real improvement in MCX’s financials going forward from FY16 onwards. Over the next 3 to 5 years, in a growing economy like India, commodity exchanges are likely to see significant growth as financial markets would see many new changes to attract local and global capital in the economy. Hence in conclusion it can be said that while profits at the net level in FY15 may remain flat, but it can be safely assumed that from FY16 onwards MCX is likely to resume its growth trajectory.

Outlook and Valuation:
Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodity futures exchange, and enjoys nearly monopolistic market share of around 90.50 % in commodity market & enjoys triopolistic situation as MCX-SX accounts for nearly 6 % market share in total currency derivtives 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. Technology for the exchange industry is difficult to replicate, and this provides the MCX as a company with a competitive advantage. Recently, on 8 December 2014, SEBI granted the MCX Stock Exchange Ltd (MCX-SX) the stock exchange arm of MCX its renewal of licence to run the stock exchange and also approved its new name from MCX-SX to ‘mSXI’ Metropolitan Stock Exchange of India Ltd. This new name will build its new identity and will bring in volumes hence will help its stock exchange to be in competition with its rivals BSE & NSE. Exchanges are almost the perfect business models with limited competition, high operating leverage and robust cash flows. Stock exchanges in particular have strong correlation to underlying economic activity. In India only two exchanges accounts for nearly 99 % market share in equities trading. Across a number of macroeconomic and broad market factors the Indian capital markets are at a “multiyear to multi decade low”. Stock exchanges would benefit substantially from the anticipated improvement in overall economic activity there by leading to high earnings growth over the next few years. NSE the Unlisted and BSE also Unlisted along with the MCX-SX which is also unlisted but directly related to MCX will be one of the best investments to play the impending recovery in economy and capital markets. India is already seeing initial signs of volume recovery with last two months & cash market volumes are up 100 % YoY. At current levels the velocity is in-line with eight year average of 60 %. Moreover with a number of new products having high potential (such as Interest Rate Derivatives, Corporate Debt, Volatility Index) in their nascent stages, exchanges would have robust volume growth over the medium term. Recently, Financial Technologies India Ltd (FTIL) sold an additional 1.65 lakh shares to ace investor Rakesh Jhunjhunwala for Rs. 2,47,500 in stock exchange MCX-SX, thereby completely exiting the bourse. Earlier on November 25, 2014, FTIL signed agreements to sell its entire 5 % stake, comprising of 2.71 crore equity shares and 56,24,60,000 warrants, for Rs. 88.41 crore. The 2.71 Cr equity shares were sold only to Rakesh Jhunjhunwala, and 38.48 Cr warrants were divided between him and Edelweiss Commodities Services, Trust Investment Advisors, Viral A Parikh, Nemish S Shah, Derive Investments, Kalpraj Dharamshi, Dhanesh Sumatilal Shah, Uday Shah, Madhuri Kela, Renuka Shah, and Madhu Vadera Jayakumar. For both MCX has received the consideration and this transaction is completed and so, the Jignesh Shah-led FTIL has now completely exited MCX as well as MCX-SX making it entirely a new scam free entity. MCX-SX has total shares of 94,31,83,776 Shares of Face value of Rs. 1 each. On the financials side real improvement in MCX’s financials could be seen from FY16 onwards as the market is keenly awaiting any financial impact of the NSEL crisis on MCX’s numbers. While the chances here of such a development is very low, even if it were to happen this will be a one off but the core business model of MCX will remain strong. Over the next 3 to 5 years, in a growing economy like India, commodity exchanges are likely to see significant growth as financial markets would see many new changes which will attract local and global capital flows into the Indian economy. Future, with the FCRA Bill the potential remains exciting given that the new products will attract new participants & India has 20 lakhs client accounts as compared with 1.9 Cr – 2 CR Demat accounts so this industry has only scratched the surface with respect to potential volumes so there’s also a new road for MCX. MCX, with its new opportunities and with the policy to maintain 50 % dividend pay-out ratio will be positive for MCX valuation. The valuation of MCX’s standalone business at 25x FY15E EPS of Rs. 30.79 gives us the standalone valuation of MCX at Rs. 770 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. Even as on Mar 2014 MCX has a balance sheet size of Rs 1743 Crs with Cash position of Rs 350 crs, a networth of Rs 1316.10 Crs with no debt on the balance sheet as on date. On a rough cut basis, in FY15, Top line will see a steady rise wherein Topline is expected to touch Rs. 375 Crs in FY15E and may be Rs. 412 in FY16E. On the bottom line level the company can report a PAT of Rs. 157 Crs in FY15E and may be Rs. 171 Cr in FY16E. Thus on a conservative basis, MCX should report EPS of Rs. 30.79 for FY15E. For FY16E expectation is EPS of Rs. 33.54.

SALES ( Crs)523.96340.66375.00412.50
NET PROFIT (₹ Cr)299.00153.16157.00171.00
EPS ()58.6730.0430.7933.54
PE (x)7.4015.7022.6022.00
P/BV (x)1.901.801.701.60
EV/EBITDA (x)10.5015.2619.8419.25
ROE (%)27.8011.807.807.60
ROCE (%)27.8011.807.807.60

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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