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.
| KEY FINANCIALS | FY13 | FY14 | FY15E | FY16E |
|---|
| SALES (₹ Crs) | 523.96 | 340.66 | 375.00 | 412.50 |
| NET PROFIT (₹ Cr) | 299.00 | 153.16 | 157.00 | 171.00 |
| EPS (₹) | 58.67 | 30.04 | 30.79 | 33.54 |
| PE (x) | 7.40 | 15.70 | 22.60 | 22.00 |
| P/BV (x) | 1.90 | 1.80 | 1.70 | 1.60 |
| EV/EBITDA (x) | 10.50 | 15.26 | 19.84 | 19.25 |
| ROE (%) | 27.80 | 11.80 | 7.80 | 7.60 |
| ROCE (%) | 27.80 | 11.80 | 7.80 | 7.60 |
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Disclaimer:
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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