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:
"In order to raise from its own Ashes
A Phoenix First Must Burn "
- Octavia E Butler.
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 |
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