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Thursday, February 16, 2012

Multi Commodity Exchange of India Limited (MCX) IPO Analysis Report


MCX IPO Review


Issue Highlights

Issue period: 22nd Feb 2012- 24th Feb 2012
Issue size:  Rs. 663.30 crore
Issue Type: 100% book building
Price range: Rs. 860- Rs. 1032
Face value: Rs. 10
Market Lot:  6 shares
Registrar: Karvy Computershare Pvt. Limited
Industry: Commodity Futures Industry
Maximum Retail subscription Limit:  Rs. 1,98,144 (192 shares)
Listing : BSE

The Offer


Total offer of shares : 64,27,378 shares
Employee reservation:  2,50,000 shares
Net Offer : 61,77,378 shares
Retail Portion: at least  21,62,082 shares
Non Institutional Shares : 9,26,607 shares
Allotment: only in dematerialized form

Stake Sell by
1.      FTIL (Financial Technologies India Limited)
2.      SBI (Equity)
3.      Corporation bank
4.      GLB
5.      BOB (bank of Baroda)
6.      Alexandra
7.      ICICI Lombard

Industry overview

What are commodity futures?
Like other futures, commodity futures are mainly used as a hedging tool to protect any future price fluctuation in the underlying asset. Commodity futures are also used as an asset allocation. Commodities traded on the exchanges are needed to be delivered on the specified contract expiry day but a very small percentage of the commodity traded is physically delivered and the rest all is settled in cash.

Salient features of Indian commodity industry
·         India has over 7000 agricultural markets better known as mandis. 
·         In the fiscal 2011 agricultural sector accounted for 14.2 percent of the GDP.
·         There are 30 commodity exchanges recognized by the Forward Markets Commission (FMC).
·         In the fiscal 2001, total value of commodity traded on commodity exchanges in India was Rs. 52,490 billion.

Future of Commodity Trading in India
India is one of the fastest growing economies of the world and for the fiscal 2011 India’s average GDP growth rate was 8.6%. India’s growth is supposed to drive the underlying demand for the commodities and Increase in physical market volume shall result in increment of hedging requirement by commodity players which ultimately shall increase derivative trading volumes.



Why commodity trading volume will multiply in future ?
·         
      Presently non-agriculture commodities are predominantly traded on Indian commodity exchanges but with increasing penetration of exchanges in rural parts of India, agricultural commodity trading has got immense potential to grow.
·         Presently option trading of commodity futures is not allowed in India. In future with government giving its consent for option trading in commodity, shall result in boosting of the  commodity trading volumes.
·         In future more intangible assets like rainfall, freights etc maybe included. Equity investors too may turn to commodity markets as a diversification move.

Company Profile




As per the turnover MCX is the leading commodity exchange of India. As of December 2011, MCX offered trading in 49 commodities futures forming a diverse range of commodities including bullions, ferrous and non-ferrous metals, energy and agricultural produces. MCX observed a turnover of Rs. 1,19,807 billion for the first 9 months of the FY 2011. As of Q3 FY 12, MCX had 2153 members and over 2,96,000 trading terminals spread across 1572 different cities of India.

Leadership position of MCX in the market


Source of revenues for MCX

·         Transaction fees derived from the trading of the commodity futures (81.5 %)
·         Member admission fees (.9 %)
·         Annual subscription fees (2.1 %)
·         Income from the investments (15.2 %)
·         Terminal charges (.3 %)

Turnover Breakup of Major Commodities



Strategic Investments of MCX



Strengths
·        
       In terms of the turnover MCX holds the number one position among commodity exchanges of India and globally it is the 5th largest commodity exchange.
·         Promoter FTIL being the technology provider, MCX enjoys the cost benefits  and easy updates of the cutting edge technology.
·         Company enjoys the leadership position (in terms of the recorded turnover) in traded Indian commodity futures with  a market share of 82.4 %.(FY 2011 figure)

Risks
·         
           MCX derives around 81 % of its income from the transactions carried on the exchange and its inability to maintain the turnover and the member-count would adversely affect its profitability.
·         Around 90% of the total turnover takes place in Silver, Gold, Crude oil and copper. Any major upheaval in any of these commodities  due to global geo-political situation might affect the turnover and profitability negatively.

 Objects of the Issue
·         
       Benefits of listing on BSE
·         Stake sell by the share holders
·         Company shall not receive any proceeds from the offer
·         Brand enhancement and public market for the company’s shares

Financial Analysis #

Parameter
FY 12
EPS
57.5 Rs.
Book Value
210.6 Rs.
P/E
17.9
P/B
4.9
ROE (Return on Equity)
27.3 %
NPM (Net Profit Margin)
47 %
ROCE (Return on Capital Employed)
38.1 %
CAGR (Profit) 3 year
23 %
PEG
.8
Current Ratio
.7
M-Cap/Sales
8.3
M-Cap/Reserve
5.14
Return on Invested Capital
48.8

# FY 2012 annualized data (9-month)
#calculation at upper band price of Rs. 1032

Inference

Since long Indian capital market has not witnessed a quality IPO. Market is desperately been waiting for this grand IPO. At the upper price band of Rs. 1032 MCX’s stock shall be trading at 17.9 times its FY 12 earnings which is well justified considering the profit CAGR of 23 %. Apart from that MCX enjoys a robust net profit margin of 47 %.  At the upper price band stock gives 27.3 % and 38.1 % returns on equity and ‘capital employed’ respectively. MCX boasts the strong reserves which will be one-fifth of its market capitalization at the upper price band.MCX is a debt free company and thus is unfazed from the high interest regime. Presently MCX is the clear market leader among Indian commodity exchanges with a whopping 87.5 % market share and thus making it a herculean task for competitors to overtake it in near future. But burgeoning number of commodity exchanges shall put a pressure on its profitability and growth numbers.
Taking the view of present bullish sentiments and grey market premium of the IPO, investors are advised to bid for the IPO at the upper price band of Rs. 1032 Rs.
With overall market remaining buoyant, this IPO is supposed to bring listing gains for the short term investors. Even for medium to long term investor upper price band of Rs. 1032 is a decent price to start accumulating the shares.
Only one thing that such a big IPO  shall list its shares on  BSE only is difficult to digest. Even small IPOs list their shares on the National Stock Exchange (NSE). Listing on both national exchanges (NSE & BSE ) ensures efficient and transparent price discovery.
However, investors are advised to apply in the IPO using ASBA.


Disclaimer
Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.


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