MCX issue may open up dead IPO market: Citigroup

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show »

This one IPO is sure to make you sit up and take note. The commodity exchange, MCX, is debuting at the bourses and the road shows are already on. It is the first among Indian exchanges to get listed and analysts are hoping for it to have a good run. The issue opens on February 22 and the price band has been set of Rs 860-1032.

Ravi Kapoor, managing director and head of equity- capital markets at Citigroup spoke to CNBC-TV18 about the prospects of MCX's IPO. Citigroup is one of the lead book-runners for the issue.

He says that this issue has the potential to open up the IPO market that had almost dried up.

Through earnings yield has been on a downtrend, MCX has delivered on volumes as well as profitability front on a CAGR basis, he says. "MCX has a very robust business model, it has management with track record and has a profitability track growth apart from potential for future growth," he says.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Is it just the fact that you have an 82% share of the commodity exchange business that makes this a compelling proposition?

A: Yes, I think it is a unique and a differentiated story. It is one of its own kind and the first among all the exchanges in India.

Q: While one understands that business is roaring at the moment, if one looks at what is available in terms of public information on the earnings, the yield has begun to decline a bit, would that be a trend?

A: All businesses go through business cycles, but if you look at the CAGR growth, both in terms of volumes and value and profitability, I think it's been very robust and that's what I would imagine the investing public should be looking at. It has a very robust business model, it has management with track record, it has a profitability track growth and a potential for future growth as well as I guess the shareholders sponsors and investors are very reputed and marky. So, I think that's probably what the investors should look at rather than some short-term abrasions which could be due to some business cycles.

Q: Market sentiment is pretty favourable at this point, good time perhaps to do an IPO. Do you think that the primary market pipeline that had dried up completely will start picking up now and specifically retail investors would also try and participate in issues like this or do you think people would still be scared given the fast nature of the rally that we have seen?

A: You are right, I think the IPO market had dried off. This issue has a potential of opening up the IPO market. We are seeing signs of opening up of the primary market; we have seen couple of blocks happening in the market. We would see more fund raising if the markets continue to perform the way they are and the flows continue to come in the way they are.
With this issuance happening, this has a potential of opening the market and I would expect more new issuances should also get lined up. It takes time to prepare an IPO and to get into the market. I would imagine new IPOs or the other IPOs would be more backended, but there would be other formats of fund raising happening definitely, if the market continues to perform the way they are.

Q: Aside of MCX IPO and the primary market, there was a lot of talk about the divestments and how the government could proceed with the first auction with ONGC, do you think the fund flow situation is robust enough to soak up this USD 2-2.5 billion paper and do you see people taking up these issues despite the kind of inherent problems we have with things like ONGC. As a banker, are you seeing enough robust fund flows to be able to support this billion dollar plus issuance?

A: Without commenting specifically on the ONGC issuance, I think in general, the way markets have surprised everyone and they have come back with a bang, investors are bringing in flows; they are on the risk on mode. If this kind of trend continues, I would think that there would be definitely a good amount of receptivity to new issuances in the market, be it in the form of Locks, QIPs, other forms which SEBI has just recently introduced as well as I said the IPO market.

Q: What is the sense you are getting with respect to the Indian markets itself- is it just that at the moment valuations are correct or do you think there is more juice left in this rally?

A: I think it's a function of two things to my mind, when the flows come in valuations do start looking up, but at the end of the last year, definitely the valuations were quite attractive. And with the flows coming in, you are seeing spurt in most of the stocks. You could see even in excess of 20-30% YTD growth in various stocks which is a function of two things - flows coming in as well as also the fact that they were attractively valued at the end of last year.

Q: For the latter part of the past year, we were the rank underperformers. Now we are the rank outperformers, not surprising because we were at such debts. What would be the red flags you would watch out for that might turn us underperformers?

A: I guess there could be many issues, but definitely in this year, the Indian macros are looking better, be it interest rate outlook or inflation outlook or the currency outlook as also the fact that as we go along in terms of one major red flag could be a reversal of flows. Right now, the flows are not showing any signs of reversal, but should they reverse then we will see some correction in the market.