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Showing posts with label MCX. Show all posts
Showing posts with label MCX. Show all posts

Tuesday, January 13, 2015

MULTI COMMODITY EXCHANGE OF INDIA LTD : COMING BACK TO LIFE - BEST ONE TO OWN !!!

Scrip Code: 534091 MCX
CMP:  Rs. 860.20; Market Cap: Rs. 4,387.0 Cr; 52 Week High/Low: Rs. 926.80 / Rs. 457.95; Total Shares: 5,09,98,369 shares; Promoters : Not Defined – 00.00 %; Total Public holding 5 % or more : 76,49,755 shares – 15.00 %; Total Public holding: 2,62,34,571 shares – 51.44 %; Public holding : 28,77,641 shares – 9.92 %Book Value: Rs. 268.41; Face Value: Rs. 10.00; EPS: Rs. 23.21; Dividend: 240.00 % ; P/E: 37.06 times; Ind P/E: 31.26; EV/EBITDA: 22.21.
Total Debt: ZERO; Enterprise Value: Rs.4,334.01 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.  The company 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 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 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:
MCX is the market leader by trading turnover in the Indian commodity exchange space. Within the commodity basket, MCX focuses on non-agricultural commodities such as precious metals, base metals, and energy with the top four, gold, silver, copper, and crude oil, accounting for 90.9 % of volumes. In these four products, MCX almost defines the market. MCX also has 5 % direct stake in MCX-SX, a stock exchange and a further 32 % stake through warrants. In August 2014 Financial Technologies India Limited (FTIL) exited commodity exchange MCX by selling its entire 26 % in the bourse, it had originally promoted. Also there is no overlap between FTIL and MCX boards as Forward Market Commission had declared FTIL unfit and improper this rule of fit and proper criterion is that any shareholder who has more than 2 % stake in a commodity exchange has to prove them self-fit and proper to run the exchange. There are 1000 brokers in common to NSEL and MCX, and there is no direct cross liability and nor are any of their high volume brokers in distressed and also no distress has been reported on BSE/NSE either. MCX management soon realised that the need of the hour is to raise the corporate governance standards and to achieve this; MCX management took some major steps like making an experts & professionals as important appointments in key positions like CFO and Company Secretary. These measures were to increase transparency in operations of MCX as well as investor interactions after the NSEL Crisis. This also brought a transitioning in MCX from proprietor driven culture to a professional culture. Further, the FCRA bill which allows introduction of commodity options, commodity indices and Institutional participation in commodity exchanges is awaiting the parliament approval and looking at the MCX’s strong positioning, MCX would be benefited with most and it will enable MCX to quickly launch new product portfolio. These regulatory approvals could act as growth driver for volumes and subsequently MCX will be benefited. Recently, Commodity markets regulator Forward Markets Commission (FMC) on December 23, 2014 allowed Multi Commodity Exchange to launch Crude oil mini futures contracts for next year. The crude oil mini futures contract will have a trading unit of 10 barrel & will be quoted ex-Mumbai price. The lot size of crude is of 100 barrels (1 barrel= 159 litres) and for mini it is 10 barrel. An individual client can trade up to 4,80,000 barrels, while a member the brokerage firm collectively for all clients can trade up to 24,00,000 barrels, as per the contract specification approved by the regulator. The Current minimum trade unit in Crude oil is 100 barrels (Rs. 3.6 lakhs) now the New Crude Mini will have 10 barrels (Rs. 36,000) in lot size. Both will have the margin of 5 %. Globally options accounts for 17 % to 25 % of the total transaction volumes in commodities and introduction of options and indices at MCX could act as substantial volume booster for the exchange. This newly launched Crude mini contracts gained traction with registering a turnover of Rs. 1,488 Cr in just four days from its launch, the open interest i.e the total number of outstanding contracts that are held by market participants has also been high at 10,000 lots per day. The sudden fall in crude oil has led many small & medium  enterprises hedge their exposure on MCX platform. This mini contract attracted trading interest from small glass manufacturing, heat treatment & Plastic processing companies, these comapnies consumes large quantity of products derived from crude oil. Also the price risk associated with large number of crude oil derivatives such as bitumen, furnace oil, asphalt, naptha is in sync with the crude oil prices. Small industries which are these byproducts can use the new contract to hedge their risk effectively as done by SMEs in mini contacts. Further MCX is likely to introduce new products like Real estate indices, Rain indices etc. which could act as growth drivers. Forward Commission Regulator Act bill clearance would also allow banks, institutions and FII’s to participate in commodity trading which will further boost the turnover of the exchange turnover. MCX earns Interest Income from the Margin money of the clients and this is recurring revenue stream. MCX currently has over Rs. 600 Crs of cash and bank balances and does not have any debt on its balance sheet as on Mar 2014, and traditionally Exchange businesses are very profitable business which is very scalable with very little incremental costs thus ensuring that ROEs and ROCE in this business remains quite strong. Post the NSEL crisis the government reacted fast to ensure that the exchange working was not halted, the government appointed few dignitaries which boosted confidence and credibility levels for MCX and this helped MCX to improve its substantially. Hence the major dust is now settled down for MCX and with the triggers like introduction of new products, and the FCRA bill will help to re-rate the MCX stock, and this can be evident by the latest acquisition of MCX shares by Ace Investors like Radhakishan Damani, Rakesh Jhunjhunwala who picked up 2 % each in MCX at Rs. 660 per share & Kotak Mahindra bank picking up 15 % stake at Rs. 660 amounting to Rs. 459 Cr. On the financials side there can be real improvement in MCX’s financials going forward from FY16 onwards. Over the next 3 to 5 years, in a growing economy like India, commodity exchanges are likely to see significant growth as financial markets would see many new changes to attract local and global capital in the economy. Hence in conclusion it can be said that while profits at the net level in FY15 may remain flat, but it can be safely assumed that from FY16 onwards MCX is likely to resume its growth trajectory.

Outlook and Valuation:
Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodity futures exchange, and enjoys nearly monopolistic market share of around 90.50 % in commodity market & enjoys triopolistic situation as MCX-SX accounts for nearly 6 % market share in total currency derivtives 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. Technology for the exchange industry is difficult to replicate, and this provides the MCX as a company with a competitive advantage. Recently, on 8 December 2014, SEBI granted the MCX Stock Exchange Ltd (MCX-SX) the stock exchange arm of MCX its renewal of licence to run the stock exchange and also approved its new name from MCX-SX to ‘mSXI’ Metropolitan Stock Exchange of India Ltd. This new name will build its new identity and will bring in volumes hence will help its stock exchange to be in competition with its rivals BSE & NSE. Exchanges are almost the perfect business models with limited competition, high operating leverage and robust cash flows. Stock exchanges in particular have strong correlation to underlying economic activity. In India only two exchanges accounts for nearly 99 % market share in equities trading. Across a number of macroeconomic and broad market factors the Indian capital markets are at a “multiyear to multi decade low”. Stock exchanges would benefit substantially from the anticipated improvement in overall economic activity there by leading to high earnings growth over the next few years. NSE the Unlisted and BSE also Unlisted along with the MCX-SX which is also unlisted but directly related to MCX will be one of the best investments to play the impending recovery in economy and capital markets. India is already seeing initial signs of volume recovery with last two months & cash market volumes are up 100 % YoY. At current levels the velocity is in-line with eight year average of 60 %. Moreover with a number of new products having high potential (such as Interest Rate Derivatives, Corporate Debt, Volatility Index) in their nascent stages, exchanges would have robust volume growth over the medium term. Recently, Financial Technologies India Ltd (FTIL) sold an additional 1.65 lakh shares to ace investor Rakesh Jhunjhunwala for Rs. 2,47,500 in stock exchange MCX-SX, thereby completely exiting the bourse. Earlier on November 25, 2014, FTIL signed agreements to sell its entire 5 % stake, comprising of 2.71 crore equity shares and 56,24,60,000 warrants, for Rs. 88.41 crore. The 2.71 Cr equity shares were sold only to Rakesh Jhunjhunwala, and 38.48 Cr warrants were divided between him and Edelweiss Commodities Services, Trust Investment Advisors, Viral A Parikh, Nemish S Shah, Derive Investments, Kalpraj Dharamshi, Dhanesh Sumatilal Shah, Uday Shah, Madhuri Kela, Renuka Shah, and Madhu Vadera Jayakumar. For both MCX has received the consideration and this transaction is completed and so, the Jignesh Shah-led FTIL has now completely exited MCX as well as MCX-SX making it entirely a new scam free entity. MCX-SX has total shares of 94,31,83,776 Shares of Face value of Rs. 1 each. On the financials side real improvement in MCX’s financials could be seen from FY16 onwards as the market is keenly awaiting any financial impact of the NSEL crisis on MCX’s numbers. While the chances here of such a development is very low, even if it were to happen this will be a one off but the core business model of MCX will remain strong. Over the next 3 to 5 years, in a growing economy like India, commodity exchanges are likely to see significant growth as financial markets would see many new changes which will attract local and global capital flows into the Indian economy. Future, with the FCRA Bill the potential remains exciting given that the new products will attract new participants & India has 20 lakhs client accounts as compared with 1.9 Cr – 2 CR Demat accounts so this industry has only scratched the surface with respect to potential volumes so there’s also a new road for MCX. MCX, with its new opportunities and with the policy to maintain 50 % dividend pay-out ratio will be positive for MCX valuation. The valuation of MCX’s standalone business at 25x FY15E EPS of Rs. 30.79 gives us the standalone valuation of MCX at Rs. 770 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. Even as on Mar 2014 MCX has a balance sheet size of Rs 1743 Crs with Cash position of Rs 350 crs, a networth of Rs 1316.10 Crs with no debt on the balance sheet as on date. On a rough cut basis, in FY15, Top line will see a steady rise wherein Topline is expected to touch Rs. 375 Crs in FY15E and may be Rs. 412 in FY16E. On the bottom line level the company can report a PAT of Rs. 157 Crs in FY15E and may be Rs. 171 Cr in FY16E. Thus on a conservative basis, MCX should report EPS of Rs. 30.79 for FY15E. For FY16E expectation is EPS of Rs. 33.54.

KEY FINANCIALSFY13FY14FY15EFY16E
SALES ( Crs)523.96340.66375.00412.50
NET PROFIT (₹ Cr)299.00153.16157.00171.00
EPS ()58.6730.0430.7933.54
PE (x)7.4015.7022.6022.00
P/BV (x)1.901.801.701.60
EV/EBITDA (x)10.5015.2619.8419.25
ROE (%)27.8011.807.807.60
ROCE (%)27.8011.807.807.60

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Thursday, January 23, 2014

MULTI COMMODITY EXCHANGE OF INDIA LTD : RISING FROM ASHES !!!

Scrip Code: 534091 MCX

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:

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 FINANCIALSFY12FY13FY14EFY15E
SALES ( Crs)526.20493.50339.10361.00
NET PROFIT (₹ Cr)286.20280.00168.80191.80
EPS ()56.1054.9033.1037.60
PE (x)24.9012.6021.0018.40
P/BV (x)7.203.102.902.70
EV/EBITDA (x)17.708.2014.2012.80
ROE (%)31.0026.0014.2015.10
ROCE (%)24.8024.8013.6014.60

I would buy MCX for Medium to Long term for target of Rs. 800. 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 ₹ 487.14 on every purchase(Why Strict stop loss of 8 % ?) - Click Here

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Monday, October 29, 2012

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 FINANCIALSFY12FY13EFY14EFY15E
SALES (Rs. Crs)526.20517.20615.20720.00
NET PROFIT (Rs. Crs) 286.20282.40339.40407.10
EPS (Rs.)56.1055.4066.5079.80
PE (x)20.9021.2017.6014.70
P/BV (x)6.005.304.604.00
EV/EBITDA (x)14.3014.7011.509.00
ROE (%)31.0026.5027.8029.00
ROCE (%)24.8025.5026.9028.20

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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