MCX IPO Review by KM Global (Apply)

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Review By K.M. Global Financial Services Ltd on February 23, 2012

Issue Period: 22nd Feb - 24th Feb
Price Band: (Rs) 860-1,032
Issue Size: (Rs Cr) 553-663
Mcap: (Rs Cr) 4,386-5,263
Grading: CRISIL IPO Grade 5
Promoter: Financial Technologies ltd
Listing: BSE
Grey Market Premium: Rs 350

Multi Commodity Exchange of India Limited (MCX) incorporated in 2002, is the leading commodities exchange in India based on value of commodity futures contracts traded. It is a de-mutualized exchange and has received permanent recognition from the Government of India on Sept 2003, to facilitate nationwide online trading, clearing and settlement operations of commodities futures transactions.

MCX has 2,153 members on its Exchange platform with over 2,96,000 terminals including CTCL spread over 1,572 cities and towns across India. MCX offers trading in 49 commodity futures based on contract specifications, from a diverse range of classes including bullion, ferrous and non-ferrous metals, energy and agriculture.

The total value of the commodity futures contracts traded at the Exchange was Rs 119,807 bn as of Dec 31st,2011 which accounts for 87.3% of the Indian commodity futures industry in terms of the value of commodity futures contract traded.

Globally, MCX is the largest silver exchange; the second largest gold, copper and natural gas exchange; and the third largest crude oil exchange in terms of the number of contracts traded in each of these commodities (in CY10 and 6 months ended June 30, 2011). Silver, Gold, Crude Oil and Copper accounts for 38%, 28%, 16% and 9% respectively, of the total value of commodity futures contracts traded on the Exchange.

• MCX's major source of revenue is transaction fees with a revenue share of more than 96% in 9mFY12. The other revenue sources are membership admission fees, annual subscription fees and terminal charges.
• Its total revenue grew at a CAGR of 32% during FY09-FY11 on the back of spurt in average daily turnover from Rs 149 bn in FY09 to Rs 321 bn in FY11. In 9mFY12, MCX reported total income of Rs 474 Cr more than its total revenue of Rs 448 Cr in FY11 as the average daily turnover improved to Rs 514 bn in 9mFY12. It reported a PAT of Rs 218 Cr during the same period.
• MCX operating margins improved from 54% in FY09 to 60% in FY11 as it enjoys operating leverage because of its fixed and semi-fixed costs . In 9mFY12 it posted an EBITDA margin of 70%. PAT margins also increased from 28% in FY09 to 38% in FY11. In 9mFY12 it posted PAT margin of 46%.
• RoE fell from 32% in FY09 to 21% in FY11 on the back of equity dilution. RoE as of 9mFY12 is 23% unannualised.
• MCX has investments of Rs 1,096 Cr (as of 31st Dec '11) out of which Rs 123 Cr is in Dubai Gold & Commodity Exchange (5% stake), MCX CCL (100%), MCX-SX (5%), MCX-SX CCL (26%) and in SME Exchange of India ltd (51%). The balance Rs 973 Cr is in liquid Mutual Fund schemes.

MCX market capitalization is Rs 4,386 Cr at Rs 860 and Rs 5,263 Cr at an upper price band of Rs 1,032. As MCX is the first commodity exchange to be listed in India there is no listed comparable in the domestic market. MCX is asking for a valuation of 14.9-17.9 times its annualized FY12 EPS which is at a discount compared to its global comps at a lower price band of Rs 860 and slightly at a premium at Rs 1,032. Considering its 87% market share in the domestic market and strong fundamentals we believe it deserves a premium. We recommend investors to subscribe this issue.

Risk to our forecast

The success of the business majorly depends on the MCX's ability to maintain and increase the number of members and the turnover on the exchange and the resultant income from the transaction fees. Any decline in the trading volume or the number of members trading on the Exchange could lead to a decline in the income from transaction fees.

Promoter

MCX is promoted by FTIL with a pre-IPO stake of 31.2%. FTIL is a software developer and a technical service provider of automated electronic solutions in the areas of finance and technology like foreign exchange, commodities and equities. It is listed on the BSE, the NSE, the Ahmedabad Stock Exchange and the Madras Stock Exchange. The promoters of FTIL are Mr Jignesh Shah (18.1%), Mr Dewang Neralla (0.13%) and La-Fin Financial Services Private Ltd (26.5%).

Proposed amendments to Forward Contracts Regulation Act, 1952

Under the current regulatory environment, foreign institutional investors, banks and mutual funds cannot trade on commodity exchanges. Further, trading in options in commodities futures is prohibited in India.

The proposed amendments to the FCRA have been made to strengthen the powers of Forward Markets Commission (FMC), permit trading in options and derivatives, demutualization of existing bourses and setting up of a separate clearing corporation. If the FCRA amendments are approved it will be a key trigger for growth at MCX.