GITANJALI GEMS : JEWEL FOR EVER !!!

Scrip Code: 532715 / GITANJALI

CMP:  Rs. 453.00; Accumulate at every levels. 

Medium to Long term Target – Rs. 510; STOP LOSS – Rs. 415.00; Market Cap: Rs. 4,170.56 Cr; 52 Week High/Low: Rs. 455.65 / Rs. 250.95

Total Shares: 9,20,65,491 shares; Promoters : 5,43,16,116 shares –59.00 %; Total Public holding : 3,77,49,375 shares – 41.00 %; Book Value: Rs. 275.10; Face Value: Rs. 10.00; EPS: Rs. 28.05; Div: 30.00 % ; P/E: 16.11 times; Ind. P/E: 11.10; EV/EBITDA: 10.53.

Total Debt: 2,056.00 Cr; Enterprise Value: Rs. 6,542.72 Cr.

GITANJALI GEMS LTD:  Gitanjali Gems Ltd was incorporated in 1986 and is based in Mumbai, India. The company was started as a partnership in the year 1966, it was the first group company to engage in cutting & polishing of diamonds in Surat, Gujarat. It came with an IPO in the year 2006 with 1.70 cr shares at the price band of Rs. 170 – Rs. 195. Gitanjali Gems has got two-diamond manufacturing facilities located at Borivali in Mumbai and at the Special Economic Zone in Surat. It has also got a 100 % export oriented unit in SEEPZ Mumbai, which produces gold and platinum studded jewellery. There are also jewellery-manufacturing facilities at MIDC, Andheri, which produces branded jewellery for the retail operations in India. The company has a workforce of over 2300 employees. Company sells its jewellery under the brand - Asmi - Premium work wear collection & has 104 outlets, 2 exclusive stores; Sangini - Entire product range including bridal jewelry; Nakshatra - Entire product range including bridal jewelry available with 374 retailers and 1 franchisee. More franchisees are being added; Gilli - Diamond jewelry at reasonable prices having 256 outlets of which 3 are exclusive stores; Vivvaha - Wedding jewelry; Maya - Gold jewelry for wedding and other similar events; D’Damas - International quality designs combined with Indian values sells through 380 retailers, 2 exclusive outlets, 3 shop-in-malls and 21 franchisees; Hoop - Fashion Silver Jewelry. The Gitanjali Group has acquired Lucera for Rs 25 crores in 2008. In October 2009, the UK-based Brand Finance, valued the four leading brands of the company at Rs.514 crores (Nakshatra), Rs.468 crores (Gili), Rs.309 cr. (D'Damas) and Rs.210 cr. (Asmi), respectively. GGL is not only gearing towards improving sales but is also looking at multiplying the value of these brands by 1.5 to 2 times by 2011-2012. With a manufacturing presence in India, its operations span the globe from the U.S., the U.K., Belgium, Italy, the Middle East, Thailand, South East Asia, and Japan. The company’s retail and distribution network comprised approximately 2,000 outlets, including 200 distributors, 94 exclusive stores, and 63 franchised stores. In December 2010, it acquired 90 % interest in Glantti Italia S.R.L. On March 17, 2011, it acquired 100% stake in N & J Finstocks Private Limited. In July 2011, it incorporated a wholly owned subsidiary Italian Jewels S.r. In August 2011, it incorporated a subsidiary Aston Luxury Group Limited. On December 2, 2011, its subsidiary Aston Luxury Group Ltd., acquired Crown Aim Limited. Gitanjali Gems Ltd is globally compared to Lao Feng Xiang Company Limited, Bulgari Societa per Azioni and Surana Corporation Limited in India.

Investment Rationale:

Gitanjali Gems is $900 million multinational group & one of the largest integrated diamond and jewellery manufacturer and retailer and diamond exporters in India. The demand for diamond and jewellery products are largely depends on higher employment and economic levels, which leave higher disposable income in the hands of the consumers. In downturn consumers can quite easily scale down their consumption of jewellery and diamonds. Gitanjali Gems Ltd has informed that Aston Luxury Group Ltd has acquired 15.3 % stake in Verite Co. Ltd in Japan. This acquisition will provide supply chain synergies to the grou. Verite Co. Ltd is a listed entity on Tokyo Stock Exchange & operates a network of 101 jewellery retail stores in Japan. This stake will also increase the presence of the Gitanjali group in one of the leading diamond jewellery markets of the world. The company launched India’s First unique and innovative Gold & Diamond ATM machines, which is a one stop shop for buying medallions, coins, jewellery etc. Gitanjali opened its first flagship store Stefan Hafner in China. The bouquet of Italian brands is now available in other markets like Russia, Saudi Arabia, the Far East & India. Gitanjali has taken strategic stake of 30 % in the GEMS TV to supply all of its diamond jewellery requirements in Japan. GEMS TV in Japan offers online shopping platform for TV channels in Japan. The Company is also engaged in retailing its diamonds and jewellery. Currently the company markets over 40 brands that are owned and franchised under its retail chain Gitanjali Lifestyle. Gitanjali Gems Ltd allotted 943,396 equity shares of Rs. 10/- each to Bennett Coleman and Company Limited (BCCL), pursuant to conversion of 943,396 warrants held by BCCL in the ratio of 1:1 as agreed upon. Consequent to the aforesaid allotment, the paid up capital of the Company has increased from 91,122,095 equity shares of Rs. 10/- each to 92,065,491 equity shares of Rs. 10/- each.

Gitanjali opens stores at DUBAI - Gitanjali group opened the largest B2B Trade showroom in the Middle East Region at Alms Tower, Dubai-UAE.

GITANJALI JEWELS LLC -
Showroom at Meena Bazaar, Dubai

The store offers extraordinary range of jewellery keeping in with the preferences of international clientele visiting Dubai, the 2,000 sq.ft is poised perfectly to attract Asians with an impressive array of renowned Gitanjali brands. Gitanjali Gems’ net profit jumps to Rs. 151.65 Cr against Rs. 132.24 Cr in the corresponding quarter ending of previous year, an increase of 14.68 %. Revenue for the quarter rose by 24.01 % to Rs. 3928.25 Cr from Rs. 3167.64 Cr, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 16.47 a share during the quarter, registering at 7.52 % increase over previous year period. Profit before interest, depreciation and tax is Rs. 271.25 Cr as against Rs. 221.36 Cr in the corresponding period of the previous year.

Outlook and Valuation:

India possesses world's most competitive gems and jewellery market due to its low cost of production, highly skilled, low-cost and best artisan force for designing and crafting jewellery, along with strong government support in the form of incentives and establishment of Special Economic Zones (SEZs). India is emerging as a huge consumer market for jewellery and other luxury products and thereby appears as a very attractive opportunity for major brands to establish their presence in the Indian market. In fact, the five-day long 29th edition of the Indian International Jewellery Show (IIJS) event organized by GJEPC, witnessed the participation of over 800 companies from India and overseas and received 20,000 pre-registration from national visitors and over 3,000 from international visitors. The event had a congregation of delegations from trade associations across India and from a host of international destinations like Bangladesh, China, Dubai, Hungary, Iran, Japan, Malaysia, Nepal, Poland, Russia, Saudi Arabia, Singapore etc. IIJS displayed the widest range of gems and jewels under the categories of couture, loose diamond, plain gold jewellery, mass produced, allied, machinery and international jewellery and loose diamonds. Gitanjali has increasingly undertaken retail expansion through the organic, inorganic and partnership routes. The retail space is around 1 million sq ft from 65,000 sq ft a year ago. The company has over 3000 Point of sales (POS). Gitanjali occupies nearly 60 % of the India’s entire organized mall space belonging to the jewellery category; it has aggressive retail expansion plans. Gitanjali expects to increase its retail presence to 2 million square feet, primarily in the domestic outlets in the next three years. All this features helps one to get that extra comfort in the stock. The total exports of gem and jewellery from India during April 2012 to September 2012 stood at $1990.24 Cr including that of cut & polished diamonds at $782.47 Cr, gold at $1071.77 Cr & coloured gemstones at $16.71 Cr. The domestic jewellery market is pegged at $1600 Cr - $1800 Cr. The gems & jewellery industry in India registered a growth in its volume of exports from $2,540 Cr in 2009 to $4,636 cr in 2011 an net growth of 82.5 %. In my view Net Sales and PAT of the company are expected to grow at a CAGR of 26 % and 32 % over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 2.98 x for FY13E and 2.42 x for FY14E. The second quarter witnesses a healthy increase in overall sales as well as profitability on account of powerful combination of exciting products, an enhanced store network and robust infrastructural Support system. At the current market price of Rs. 453.00, the stock is trading at a PE of 6.47 x FY13E and 5.10 x FY14E respectively. The company can post Earning per share (EPS) of Rs. 69.98 for FY13E and Rs. 88.68 for FY14E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. One can ‘BUY’ in Gitanjali Gems with a Medium to Long term investment for a price of about Rs. 510.00.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	9,456.40	12,498.27	15,997.80	19,037.37
NET PROFIT (Rs. Crs)	354.81	487.25	637.66	808.03
EPS (Rs.)	41.81	53.47	69.98	88.68
PE (x)	9.66	7.56	5.77	4.56
P/BV (x)	1.36	1.19	0.99	0.81
EV/EBITDA (x)	5.44	3.85	2.98	2.42
ROE (%)	14.16	15.79	17.22	17.95
ROCE (%)	12.34	13.95	16.08	17.49

I would buy GITANJALI GEMS with a price target of Rs. 510 for the 6 month target. 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. 415.00 on your every purchase.

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HAPPY DIWALI & A PROSPEROUS NEW YEAR SAMVAT 2069 !!!

HELLO READER FRIENDS, 

Here's Wishing You n your Family

A VERY HAPPY DIWALI &

   A PROSPEROUS NEW YEAR !!!!

 

We meditate on the Glory of the Creator ; 

Who has created the Universe ; 

Who is worthy of Worship ;

Who is the embodiment of Knowledge and Light ; 

  Who is the remover of all Sin and Ignorance ;

May He enlighten our Intellect.

Gayatri Mantra....

There's always something warm and bright, about this time of the year, when everything has a special glow, and hearts are full of Cheer, that's why this special greetings comes your way, to wish you all a life's best on Diwali and in the coming year too.....

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PRIME FOCUS LTD : CREATING A WHOLE NEW WORLD !!!

Scrip Code: 532748 / PFOCUS

CMP:  Rs. 48.35; Buy at current levels.

Short term Target - Rs. 53.00; Medium to Long term Target – Rs. 70; STOP LOSS – Rs. 44.50 Market Cap: Rs. 719.77 Cr; 52 Week High/Low: Rs. 64.15 / Rs. 37.10.

Total Shares: 14,88,67,446 shares; Promoters : 7,57,87,712 shares –50.91 %; Total Public holding : 7,30,79,734 shares – 49.09 %; Book Value: Rs. 21.93; Face Value: Rs. 1.00; EPS: Rs. 2.14; Div: NIL % ; P/E: 22.59 times; Ind P/E: 29.86; EV/EBITDA: 17.43.

Total Debt: Rs. 116.22 Cr; Enterprise Value: Rs. 1,211.15 Cr.

PRIME FOCUS LTD: Prime Focus Ltd was incorporated as in 1997 and is based in Mumbai, India. Prime Focus Limited, a visual entertainment services company, provides creative and technical services to the film, broadcast, advertising, and media industries primarily in India, the United States, the United Kingdom, and Canada. The company offers various services, including on-set supervision, production assistance, motion control, data lab, VFX, animation, motion graphics, animatics, pre visualization, image science, digital intermediate, telecine, editing, audio, stereo 3D post, versioning, duplication, encoding, DVD authoring, digital distribution, restoration, digital archiving, and digital YCM services. It also provides CLEAR, a hybrid cloud multi-platform content operations solution that enables the management of content operations, such as content preparation and processing, content management, content production, multi-platform content delivery, and rights management and monetization. In addition, the company offers View-D, a system for the conversion of 2D moving images to stereo 3D images; SPF WORLDVERSIONING, a service to assist with the smooth rollout of global and media marketing campaigns; and CLEAR CPM, which is a campaign management tool that provides interface for TV, online, and print management delivery. Further, it is involved in the digital content management, camera rentals, media and other investments, and post production of television commercials; and digital asset management, as well as provision of graphics for feature films. The Company is compared with Balaji Telefilms ltd and with Eros International Media Ltd , DQ Entertainment International Limited, Crest Animation Studios Limited, Colorchips (India) Limited   locally and with British Sky Broadcasting, Antena 3 de Television SA, Meredith Corp, ITV PLC, Mediaset SpA, Time Warner, News Corp, Walt Disney Co, Lagardere SCA, Aegis Group and RealD Inc globally.

Investment Rationale:

Prime Focus Ltd is a  global visual entertainment company in the technical services in film & entertainment industry that offers end-to-end services ranging from pre-production to final delivery including visual effects, three dimension conversion, animation. Prime Focus Limited generates revenue about 40.6 % from the 2D to 3D conversion; about 19.3 % comes from Visual Effects (VFX); Post production contributes about 35.8 % in the revenues and finally the Content Infrastructure Management contributes about 4.4 % to the revenue of PFL. Prime Focus Ltd (PFL) is a global visual entertainment services company providing end-to-end services ranging from visual effects (VFX), 3D conversion and complete post-production services to a worldwide clientele and has worked in 10 of the world’s top 30 blockbusters movies in the past three years. Over the years, it has successfully acquired companies in the UK and North America, turned them around and consolidated its position in the global market. It has operations in North America, UK and India and has built a ‘state-of-the-art’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It has 15 global facilities with total employee base of 4,500. PFL’s VFX business is witnessing strong growth and they are focused on continuously increasing their share in $5 billion market by making investments in Vancouver and London. In FY12, the VFX business contributed Rs. 149.30 Cr to the top line, which is an 80% increase over the previous year and is expected to grow at 33% in the coming years. PFL is the market leader in the 3D conversion business with a market share of nearly 50% and few international competitors, thus enjoying a benefit of off-shoring resulting in higher margins of nearly 40% at EBIDTA level and is targeting a 30% growth in FY13E and FY14E. Considering the strong potential of these business vertical, we expects it to be a major growth driver for the company going forward. PFL offers a cloud based technology platform CLEAR through its subsidiary prime focus technologies (PFT) to the media and entertainment industry. It helps manage content, workflows, supply chain logistics, interactions, and production and operations management tool for clients like Associated Press, British Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel. CLEAR is the world’s first hybrid Cloud technology platform managing over 150,000 hours of content for Broadcasters, Studios & brands worldwide. It has registered robust growth of 205.3 % y-o-y in FY12 (contributed 4.4 % to revenues) and stood at Rs 33.60 Cr. We expect the platform to grow at 100 % in FY13 to Rs 70 Cr on account of its strong order book of US$ 12 mn executable in the next 12-18 months.

Outlook and Valuation:

Prime Focus Ltd’s current order book is about $90 million, which is executable over the next 18 months and is bifurcated into the conversion business and CLEAR, with 2D to 3D conversion and VFX accounting for $80 million and CLEAR comprising of the remaining $12 million. In addition, PFL has an order book of $150 million in the pipeline from a long term perspective of 4-5 years which provides revenue visibility. 

Major Contributor in Hollywood blockbuster Movie "Avatar"  :

Prime Focus Added Graphic Dimension to ‘Avatar’ 

PRIME FOCUS had contributed a number of shots to James Cameron's stereoscopic 3D feature film "AVATAR" which featured numerous stereo graphics & 'Holotable' displays, animated graphics for immersive environments and other visual effects which were created by PRIME FOCUS. Its VFX team created displays called Immersives that provided a 180 degree stereo perspective allowing actors acting as military personnel to control air traffic flow in 3D. The recent KPMG report anticipates the market size of Indian Music & Entertainment sector to touch Rs 1,45,700 Cr (US$ 25.51 billion) by 2016. It is expected that the PFL’s revenues and profitability can grow at a CAGR of 29.7 % - 33.9 % to Rs. 1300 Cr over FY12-14E driven by strong order book in the 2D-to-3D conversion space, traction in CLEAR platform and expansion in margins. It is expect that the company to witness robust traction and value unlocking in the US and UK business which contributes 85 % to total revenues. The company operates at healthy EBITDA margins of 30% which we expect to expand going forward with the increase in revenues from non linear streams like 3D-VFX and CLEAR platform which fetch higher margins. There are only 68 movies in the world which are available on 3D and there is huge opportunity left in this space. The cost of converting a movie from 2D to 3D ranges between $10 million to $15 million while in return it fetches huge cash flows due to higher ticket prices, no piracy and lower distribution costs. Further, with rise in demand for 3D Movies, the current growth momentum is expected to continue in the next two years. PFL’s track record of providing various technological offerings to content owners through efficient execution has led to clients like Warner Bros, 20th Century Fox, Sony etc become a part of its global clientele PFL enjoys a leadership position in the 3D conversion business with a global market share of 50 %. PFL’s off shoring advantage enables it to operate at higher margins as compared to its global peers and hence provide it a competitive advantage. Global network of integrated studios provides time and cost benefits to clients, giving PFL and edge over competitors of FY15E. PFL has set up 3000+ seat capacity ‘View D’ technology center at Goregaon Mumbai and Chandigarh locations to cater to the outsourcing need of 3D conversion and VFX Global strategic client base like Warner Bros., DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment PFT. The concerns would be the FCCB's which would raise debt levels to Rs. 434.6 Cr. The company to decide in the EGM today to issue & allot on preferential basis warrants not exceeding 2,01,12,164 in number representing the right to subscribe to 2,01,12,164 equity shares of face value of Re.1 for an aggregate amount of Rs. 104 Cr. The company trades at a P/E of 5.9x times its FY13E earnings which is believe is at a steep discount to its peers, considering its higher return ratios RoE of 29.3 %, robust revenue and PAT CAGR for FY12-14E, expanding margins and immense growth potential in 2D-3D conversion market space and strong global presence. In my view PFL could report FY13E EPS of Rs. 7.90/sh and for FY 14E of Rs. 10.60/sh. The stock could be bought for the target price of Rs. 54 & recommend to Accumulate the stock on every dip.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	503.00	771.90	1,007.20	1,294.90
NET PROFIT (Rs. Crs)	76.10	99.20	132.80	178.00
EPS (Rs.)	5.30	6.10	7.90	10.60
PE (x)	24.14	7.90	5.90	4.40
P/BV (x)	2.34	1.60	1.90	1.30
EV/EBITDA (x)	18.43	5.00	4.50	3.20
ROE (%)	29.80	23.70	29.30	35.70
ROCE (%)	13.90	13.70	16.30	17.30

I would buy PRIME FOCUS LTD with a price target of Rs. 54 for the short term and Rs. 85 for the 6 month target. 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. 44.50 on your every purchase


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MCX : MULTI COMMODITY EXCHANGE - India's New Stock Exchange !!!

Q 2 RESULTS ON 2nd November 2012 !!!

Scrip Code: 534091 / MCX

CMP:  Rs. 1384.20; Buy at Rs. 1375 - 1385 levels.
Medium to Long term Target – Rs. 1440; STOP LOSS – Rs. 1274.00; Market Cap: Rs. 7,059.19 Cr; 52 Week High/Low: Rs. 1446.95 / Rs. 838.00

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. 195.52; Face Value: Rs. 10.00; EPS: Rs. 56.12; Div: 240 % ; P/E: 28.02 times; Ind P/E: 26.67; EV/EBITDA: 14.02.

Total Debt: Rs. ZERO Cr; Enterprise Value: Rs. 7,059.19 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 holds a market share of over 85 % 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 Financial Technologies (India) Ltd in India, 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 near monopolistic market share of 86 % in FY12. MCX enjoys a competitive edge, given that its trading platform is supplied by its promoter, Financial Technologies India (FTECH), which is a leading developer of exchange related software and technology. Technology for the exchange industry is difficult to replicate, and this provides the 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. So far, it has handled a high of 1,867,612 trades in a day. MCX has 2,170 members and 346,000+ terminals including computer-to computer links (CTCLs) spread over 1,577 cities and towns across India as at the end of FY12. The number of terminals has increased from 117,000 in FY10. Healthy terminal additions partially offsets the risk of lower volumes traded per member, with gradual ramp-up in volumes expected from new additions. Being the largest commodity exchange in India, with near-monopolistic market share, MCX is the key source of data on commodity trends. This gives MCX the opportunity to benefit from new non transaction revenue sources like market data product and information offerings.  This not only provides scalability to the business model, but also offers potential for growth with limited incremental costs. Growth in commodity markets facilitate demand for better trading and analytical tools, risk management tool, market data products and price information offerings which could be new revenue streams. Globally, exchanges derive 10% - 15 % of their revenues from such services. Indian exchanges do not match that number, especially in equities, given weak acceptance of algorithmic trades. MCX is better placed to garner revenues from such sources, given its speedier execution in such trades, which already constitute significant proportion of the company’s volumes. To facilitate the same, MCX has entered into 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. It is expected that it 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 that government on 4th October cleared the new FCRA Bill which seeks to provide complete autonomy to the commodities FMC and introduce new categories of products, with MCX having 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.

Outlook and Valuation:

MCX-SX, promoted by MCX and FTECH, was recently cleared to become a full-fledged stock exchange. Like BSE and NSE, it can now start trading in equities, equity derivatives and other asset classes. Currently, MCX-SX only offers trading in currency futures contracts, but soon MCX-SX intends to have a dedicated platform for small business, and hopes SME's should aspire to raise upto US$ 20 million annually through such platforms. There are at least 1% of the 30 million SME's which have strong balance sheets to get AAA rating and can look at raising money from the primary market, many SME's depend on informal system for their financing needs, paying upto 2% per month for debt & in spite of a such a high cost of servicing debt, the business continues to remain competitive & wonder quantum of benefits which will accrue if they shift to formal way of finance and access the Equity Markets. Private equity, Venture Capital and Angel Funds will invest in such companies only if they are confident of an exit route which can be made easy by the formally platforms like exchanges..

MCX-SX announced its flagship index of MCX Stock Exchange (MCX-SX) known as ‘SX-40’ which will be a free float based index of large market cap and liquid stocks representing most important sectors. MCX-SX will collaborate its indices with the initiatives support from the sources like Indian Statistical Institute – India’s premier research institute, FTSE, London and FTKMC in creating various domestic and global indices. This partnership will help MCX-SX to create new indices that will enable domestic and global investor to track, analyse and invest in India’s dynamic financial markets. The value from MCX-SX is more definite than merely option value, considering this FY14 is expected to be first full year with operations in currency and equities. MCX-SX Equity Stock Exchange is in competition with BSE & NSE. The Bombay stock exchange had a legacy of 132 years in India, a reliable brand, with the letters almost becoming synonymous with investing in India. However, all this was till NSE came onto the scene in 1992. Being a relatively new entity, NSE was nimbler and more receptive to innovation. While it was difficult for NSE to carve a niche initially, but quickly realizing the importance of IT and innovative products to meet the growing sophistication of the financial markets, NSE raced ahead to rule market share charts. However the share of it has continued to improve even after the shift of balance in power is reflected in the turnover metrics on the two exchanges since FY01. MCX-SX, with its parentage of Financial Technologies, has access to technology and management having experience of operating exchanges successfully across the globe will successfully be able achieve its share of market pie. On valuation side - NSE received a valuation of Rs. 17,100 Cr in the last known stake sale which happened in December 2011, which discounted its FY12 revenues by 11x . This is at par with the Price/Sales ratio that Singapore enjoys. MCX-SX had revenues of Rs. 39.1 Cr in FY11. However, the levying of transaction charges in currency futures had commenced only from August 2011, implying that in FY12, the company had 7 months of additional income in the form of transactional charges in FY12. Going by the volumes and rate card, this translates into Rs. 41.5 Cr of revenues from transaction charges, and even if we assume that other sources of income reduced as member additions may have fallen, FY12 revenue would still be higher than Rs. 60 Cr. Given the low base and high growth, the valuation multiple could be higher, so discounting FY14E the revenue is estimated at Rs. 130 Cr by 11x, to arrive at a valuation at Rs. 1400 Cr. MCX's stake in MCX-SX (including warrants) amounts to Rs. 540 Cr. Within the next 18 months, the shareholding of MCX and FTECH in MCX-SX will have to be reduced to 2.5 % each, as the approval is subject to the condition that the combined voting rights of FTECH and MCX in MCX-SX will not exceed 5 %. Earlier, FTECH held 31 % and MCX held 38 % in MCX-SX. Then, to comply with SEBI guidelines for starting equity trading, they reduced their stake in MCX-SX to 5 % each. This was done through conversion of excess equity stake (beyond 10 %) to warrants. This led to 68.2 % reduction in capital from Rs. 170 Cr to Rs. 54 Cr. The warrants will be sold to banks and financial institutions. The value of MCX's standalone business comes at 20x FY14E, in-line with the average multiple to commodity exchanges in the emerging markets. There are enough reason for MCX to even trade at a premium given the scope to outgrow peer exchanges globally, given that the potential is still untapped in India, its higher growth will be augmented by even better earnings and improvement in return ratios (variable costs largely only in the form of transaction fees paid to parent), and its near-monopolistic market share, to which there is little threat, given MCX’s technology backbone and readiness to latch on to new opportunities and also the policy to maintain 50 % payout ratio is a key valuation positive. The valuation of MCX’s standalone business at 20x FY14E EPS of Rs. 66.5 – Rs. 1,330/sh; the valuation of the stake in MCX-SX (incl. warrants) comes at Rs. 4,500 Cr. Assuming a revenue base of Rs. 130 Cr in FY14, at 11x FY14 Sales, MCX-SX's valuation is Rs. 1400 Cr (much lesser than that implied in the last stake sale). Stake in MCX-SX (including 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/sh and for FY 15E of Rs. 76.50/sh. The stock could be bought for the target price of Rs. 1440 implies 23 % upside in earnings and recommend Accumulate on the stock.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	526.20	517.20	615.20	720.00
NET PROFIT (Rs. Crs)	286.20	282.40	339.40	407.10
EPS (Rs.)	56.10	55.40	66.50	79.80
PE (x)	20.90	21.20	17.60	14.70
P/BV (x)	6.00	5.30	4.60	4.00
EV/EBITDA (x)	14.30	14.70	11.50	9.00
ROE (%)	31.00	26.50	27.80	29.00
ROCE (%)	24.80	25.50	26.90	28.20

I would buy MCX INDIA LTD with a price target of Rs. 1440 for the 6 month target. 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. 1274.00 on your every purchase.

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