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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