Big bang MCX IPO to revive primary market?

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Big bang MCX IPO to revive primary market?

The primary market is back with a bang with the Multi Commodity Exchange’s IPO which opens today, reports CNBC-TV18’s Varinder Bansal.

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Excerpts from Power Breakfast on CNBC-TV18 Watch the full show »

The primary market is back with a bang, with the Multi Commodity Exchange 's IPO which opens today. It's a very good offering, and the company is looking to raise anywhere between Rs 553-663 crore at a price band between Rs 860-1032, reports CNBC-TV18's Varinder Bansal.

Most of the people in the market are discounting the upper band because the company yesterday went ahead and raised Rs 96 crore via anchor investors at the upper band, which is Rs 1032. Some of these investors include Blackrock, Deutsche, Kuwait investment authority and Credit Suisse.

At the upper band, the market cap of the company will be nearly Rs 5200 crore.

IPO Scan: Multi Commodity Exchange of India

Just to talk about the financials, the company reported profits of nearly Rs 176 crore last year. In 9 months of FY12, they made a PAT of nearly Rs 218 crore. Most of the people on the street are estimating an EPS of nearly Rs 60 for FY12, so on that basis the street believe that the IPO is fairly valued anywhere between 15-18 times FY12 calendar year earnings.

While CLSA clearly says that MCX valuation would be the lowest among the Asian peers, return on asset (ROA), return on equity (ROE) and EBITDA margins are not as strong. EBITDA margins are at 52% against some of the Asian peers like CME and ICE which operate at nearly 60-70% margins. The ROA is nearly 13% compared to 15%, and average ROE of 20% is a bit lower than nearly 21-22% what we seen on the Asian peers. But the valuation that they have come out with is really comforting, even in the global arena and the Asian peers as well.

But having said that, there are few concerns for the company, the most important being the commodity transaction tax which could come up in the Budget. If that comes in, it will be dampener for the company. Also MCX uses software and IT support from financial technologies and it pays near 46% of the PBT to the parent company. Any changes in this will be important to watch out for. Another factor is that nearly 33-35% revenues come from speculative activities, so any changes in the market to volatility will of course affect the earnings. Also the concentration risk is high; four commodities form nearly 70-80% of MCX trading volume, so if the commodity cycle turns you could see revenues dip going ahead.

But the important thing is that the company has been growing at a CAGR of nearly 33% for last five years, and people expect that growth to be maintained. Of course you have to watch out for that big trigger which is the MCX owning 5%, and if that permission comes in, that would be a good bump for the company going ahead as well.

Having said that, it's a good IPO because they offering it at reasonable valuation to the peers. Going with the gray market which is hovering around Rs 300-350, it will be a big bang.

Watch the accompanying video for more details..