MCX IPO price band looks reasonable: Way2Wealth

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MCX IPO price band looks reasonable: Way2Wealth

Way2Wealth has come out with its research report on Multi Commodity Exchange of India (MCX) IPO. Research firm advised investors to subscribe the issue at upper end of price band of Rs 860-1032/share.

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Way2Wealth has come out with its research report on Multi Commodity Exchange of India ( MCX ) IPO. Research firm advised investors to subscribe the issue at upper end of price band of Rs 860-1032/share.

Multi Commodity Exchange (MCX), set up by Financial Technologies (India) Ltd (FTIL) as a demutualised exchange, is the largest commodity exchange in India and 5th largest commodities exchange in the world in terms of volume traded. The objects of the issue is to achieve benefits of listing and provide liquidity to existing shareholders.

MCX currently holds a market share of 87% of the Indian commodity futures market, and has more than 2,100 registered members operating through over 296,000 terminals (including computer-to-computer link), across India. MCX offers trading in more than 50 commodities across various classes such as bullion, ferrous and non-ferrous metals, and a number of agri-commodities on its platform.

Product and Service Innovation: MCX's strength lies in its ability to introduce new and innovative products. It was the first exchange in India to offer futures trading in steel, crude oil, and almond and first exchange in India to initiate evening sessions to synchronize with the trading hours of global exchanges. MCX has also launched Exchange of Futures for Physicals transactions for the first time in India in 2009.

Scalable technology platforms: The technology platform and business model of MCX is highly scalable and have the potential to generate better margins at greater volumes. The current technology infrastructure is sufficient to handle daily trading volumes of up to 10,000,000 trades a day, and have handled a high of 1,867,612 trades in a day. Thus, the overall business model is highly scalable and that it offers potential for economic growth of MCX's business with limited incremental costs.

Strong earnings growth: MCX's operating revenue has grown at a CAGR of 32% over FY09-11, with major growth coming from transaction fees that grew at a CAGR of 37% over the same period. EBITDA margin improved to 70% in 9mFY12 from 53.6% in FY09, due to benefit of operating leverage.

Key Concerns:

If commodity transaction tax (CTT) in the upcoming Union Budget is introduced, it could hamper trading volumes as jobbing volumes will decrease. CTT was earlier introduced in Union Budget 2008-09, but the proposal was reversed in 2009-10.

In an event of an adverse outcome in the outstanding litigation between MCX-SX and SEBI in relation to the application for diversification of trading operations, it may not be able to benefit from the investments the Company has made in the form of equity share capital and warrants in MCX-SX.

Any reduction in the volatility of the prices of the commodities traded on its exchange may result in a decrease in the trading volume on its exchange, which could have an adverse effect on its business and operations.

Valuations & Advise: At the offer price band of Rs 860 - 1,032, the issue is available at FY12E annualized P/E of 14.6-17.5x. If one assumes a 30% EPS growth for FY13, it would be trading at P/E of 12.2-14.6x which is at a discount to its global peers despite strong growth potential. Given the robust business model, strong growth prospects and strong balance sheet, the IPO price band looks reasonable. Investors can Subscribe to the issue at the upper price band.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment