Subscribe and hold on

Multi Commodity Exchange of India Limited or MCX is tapping the capital markets with its IPO which is an offer for sale from Wednesday the 22nd of February to the 24th of February. The price band is Rs 860-1032 and the offer for sale is for 64,27,378 equity shares. The offer includes a reservation of 2,50,000 equity shares for eligible employees as well. The company is planning allocation to anchor investors as well.

Business
The company MCX is the leading commodities exchange in India based on value of commodity futures contracts traded. The average daily traded volume in the nine month period ended December 2011 is over Rs 51,000 crs. Currently trading is offered in 49 commodity futures from a diverse range of classes including bullion, ferrous and non-ferrous metals, energy and agriculture. It may be mentioned that the same underlying physical asset traded under different contract specifications is regarded as a separate commodity future. For example Gold, Gold Mini and gold guinea all of which are gold futures contracts are treated as three different commodities in deriving the total number of futures traded. The exchange as of 31st December 2011 has 2,153 trading members and has over 2.96 lakh trading terminals.

MCX compares favourably with global exchanges and based on comparisons for the calendar year 2010 and the first six months of the calendar year 2011, they were the largest in Silver, second largest in Gold, copper and Natural Gas and third largest in Crude Oil. If one speaks of an overall basis it is ranked 5th globally in terms of trading of number of contracts based on the first six months of calendar year 2011. The market share of MCX is a staggering 87% plus and the difference between the next in line is huge with NCDEX at less than 9.5% market share.

MCX uses the technology and the trading platform which has been supplied by its promoter company Financial Technologies Limited which is the most widely used trading software in the broking community. The main revenue earners are the transaction fees received from the brokers with respect to the trades executed on the exchange.

Objects of the Offer
The entire issue is an offer for sale therefore not a single rupee of the sale proceeds would come to the company. The object therefore is to achieve the benefits of listing on the BSE and to carry out the sale of equity shares of the selling shareholders. This listing would make MCX the first and so far the only stock exchange to be listed on the Indian bourses. Other benefits of listing would include enhancing the brand name of the company, and provide liquidity to the existing shareholders. The listing would also provide a public market platform for the equity of the company.

Financials
The primary source of revenue for the company is transaction fees or charges and accounts for the bulk of revenue. Other operational income comes in the form of membership fees on admission and annual membership fees, terminal charges and other non-operational income mainly from treasury management.

The company enjoys operating margins in excess of 70% and has one of the highest gross and net margins globally. It is important to also note that currently options on commodities are not permitted in the country as yet. Globally options are as largeas the futures trade and once the same is permitted the landscape of commodity exchange would undergo a sea change.

The growth in traded contracts has increased at a CAGR of over 90% in the eight year period 2004-2011. The company enjoys very high net margins as well.

The operating revenue for MCX has grown from Rs 2124 million in the year ended March 2009 to Rs 2874 million in March 2010, to Rs 3689 million in March 2011 and Rs 4023 million in the nine months ended December 2011. On the operating front the growth has been in the region of 30% year on year and in the period ended nine months December 2011 are more than double of what they were in 12 months ended March 2009.

Other income has varied substantially and that has made a difference in the net profit of the company. This other income includes profit on long term investments of Rs 889.21 million in 2009 and Rs 1469.98 million in 2010. Excluding this onetime amount there is predictability in the numbers.

The company is a regular dividend paying company and has being paying dividends of a minimum of 50% or more over the last five years. The present shareholding is broadly classified into three categories with promoter, institutional investors and Indian Financial institutions holding roughly or broadly speaking a third of the company each.

Track record of Merchant Bankers
This is the first issue which has the track record of merchant bankers in their previous issues mentioned in the Red Herring Prospectus. The record of the three merchant bankers is as follows: –

Edelweiss Financial Services Limited
This merchant banker has handled 8 issues in the last three years of which 2 were in 2009-10 and 6 in 2010-11. Of these 8 issues 4 were trading at a discount on the 30th day of trading while 4 were trading at a premium. If were to change this to the last trading day for the week ended 17th February 2012, the record would change to 6 issues trading at a discount and 2 issues trading at a premium.

Citigroup Global Markets India Private Limited
This merchant banker has handled 6 issues in the last three years of which 3 were in 2009-10, 2 issues in 2010-11 and 1 in 2011-12. Of these 6 issues 4 were trading at a discount on the 30th day of trading while 2 were trading at a premium. If were to change this to the last trading day for the week ended 17th February 2012, the record would change to 2 issues trading at a discount and 4 issues trading at a premium.

Morgan Stanley India Company Private Limited
This merchant banker has handled 9 issues in the last three years of which 5 were in 2009-10 and 4 issues in 2010-11. Of these 9 issues 3 were trading at a discount on the 30th day of trading while 6 were trading at a premium. If were to change this to the last trading day for the week ended 17th February 2012, the record would change to 5 issues trading at a discount and 4 issues trading at a premium.

Comparisons
There is no listed stock exchange in India and therefore there is no comparable within the country. Globally one could try and compare this with the Malaysian Stock Exchange. There are some major differences in the growth rate with the Indian market growing around 30% even now against the global average of a little over 10% and the Asia Pacific region of about 16.4%. The introduction of options in commodities would be a big kicker for volumes and would further help in the growth of the market.

Valuations
The offer for sale is in a broad range of 15 to 18 times the annualised earnings for the year ending March 2012 based on the nine months actual earnings for the period ended December 2011. The company MCX is an exchange and if one were to compare the benchmark BSESENSEX or NSENIFTY they are trading at multiples which are around the valuation of MCX. In other words one is being offered shares of an exchange at valuations which are similar to that of the benchmark indices, which is a fair valuation.

Risks
There could be imposition of Commodities Transaction Tax which would be akin to Securities Transaction Tax which could affect trading volumes and transaction costs in the immediate short term. The bigger risk would then be in containing the trade within the country as one could find large consumers, manufacturers and producers and hedgers wanting to take exposure or hedge trades in exchanges outside the country rather than within the country. The second risk is the fact that increased competition from new exchanges could hit the company which has a market share of 87%. In more cases than one it has been seen that the markets expand when competition increases but the more than dominant player could be a loser.

The big driver for the share would certainly be the introduction of options on commodities as and when they are permitted. Global markets, raw material security and hedging of inputs would all be triggers in favour of the company.

The company has done allocation to anchor investors at the upper end of the price band of Rs 1032 and this looks like the likely price at which the share would be allotted to applicants unless the selling shareholders decide to give a gift and offer a lower price to incoming shareholders.

Conclusion
This is a primary offering after a lapse of almost five months and a decent offering after a very long time. There is a very active grey market premium on the issue which is around 30% of the issue price. This premium would ensure excellent response from HNI’s who would leverage and apply in large numbers. If one were to hazard a guess it would not be too risky that say an oversubscription of 100 times by HNI’s is quite likely. The retail subscription needs to cross 7 lac applications for there to be a lottery for applicants applying for the maximum permissible Rs 2 lacs.

MCX will do well as an issue if level of subscription would be any indication. This issue would be the first to list under the new listing day trading restrictions where issues of a size of Rs 250 crs or more would after a price discovery period of 1 hour would be subject to a 20% price band from the discovered price. The cost of leveraged HNI will also be a key factor in determining the market price post listing.I recommend that investors looking for listing gains and sustainable growth with a proxy for India growth story must apply.

SEBI Disclaimer: – I intend to subscribe to the above issue.