MCX IPO: If Novelty Excites, Go For It! Or Else, Avoid!

MCX IPO: Offer For Sale

Multi-Commodity Exchange of India (MCX) has decided to tap the equity markets to garner Rs 553 –663 crore through an offer for sale of 64.27 lakh shares, to be issued at a price band between Rs 860 to Rs 1,032 per share. Financial Technologies (FTIL), State Bank of India, GLG Financials, Alexandra Mauritius, Corporation Bank and ICICI Lombard would divest their stakes in the company. The object of the issue is to achieve the benefits of listing on the Bombay Stock Exchange and MCX won’t accrue any proceeds from the offer. The issue is slated to open on February 22, 2012 and close on February 24, 2012.

About The Company

MCX India, promoted by FTIL, is engaged in the business of electronic commodity futures’ trading and offers online trading facility along with clearing and settlement operations for commodity futures in India. With a network of 2,153 members having 2,96,000 trading terminals, the company is recognised as India’s leading commodity exchange house, commanding market share of 87 per cent (as on December 31, 2011) in terms of value of futures’ contracts traded. Globally the company is ranked No 1 for silver, No 2 for gold, copper and natural gas, and No 3 for crude oil in terms of volumes.

Business Model

MCX offers trading facilities in 49 commodity futures across bullions, metals, energy and agriculture products. The transaction fees (charges paid by members for execution of trades) contributed 96 per cent of the operating income as on December 31, 2011. The annual subscription fees, membership admission fees and terminal charges constitute the remaining portion of its operating income.

Financials & Valuations

On the financial front, while its topline has registered a CAGR of 32 per cent between FY09-11, the bottomline has reported a CAGR of merely 5.35 per cent. However, between April-December 2011, the company’s revenues and net profits have grown by a decent 11 per cent and 23 per cent respectively.

On the valuation front, due to lack of any listed peers on the Indian equity indices, we have compared MCX with the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), who operate on similar business models. As per our valuation matrix given below, MCX seems to be cheaper when compared to both NSE and BSE.

However, when compared to NASDAQ-listed Chicago Mercantile Exchange (CME), which is a much more matured player operating in a similar business area, the shares of MCX seem expensive. We believe that such high valuations would not leave much on the table for retail investors to feel good about.

Recommendation

One cannot argue the fundamental prowess of MCX’s business model and operational ability. The “5/5 IPO Grade” accredited by CRISIL is in itself a certificate of its excellence. However, over the past couple of years there have been many companies with unique and novel business models who tapped the equity markets with a bang but today the zeal in their business seems to have fizzed away. Some of the classic examples that one could refer to are SKS Microfinance and Suzlon Energy, who at first were highly hailed for their business expertise but their shares are today available at a considerable discount to the IPO offer price.

Though MCX with its fairly robust business model has delivered positive results since the company’s inception, we suggest that readers should maintain some caution before going gung-ho into the IPO offer. Moreover, the recent robustness seen in its financial as well as operational performance over the past year has been chiefly on account of high trading activity in gold and silver commodity futures. The value of gold and silver futures traded on MCX has shot up rapidly by 33 and 69 per cent to Rs 32,955 and Rs 45,743 billion during the first nine months of the current fiscal. Going forward, the sustainability of such growth is highly questionable.

Also, as 90 per cent of MCX’s turnover is generated through metals and energy commodities, the revenue stream seems very concentrated. The restriction of listing to BSE might also impact the volumes in its shares traded, as it has historically been observed that scrips listed on NSE enjoy larger volumes.

Finally, there seems to be no concrete clarity over the passage of the proposed amendments to The Forward Contracts (Regulation) Act (FCRA), which aims to not only allow options to be traded on the Indian commodity bourses but also permit FIIs and mutual funds to take part in commodity trading. Until and unless such an act sees the light of the day, we don’t see any new alphas being created for investors.