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| Qualified Institutional Bidders (QIBs*) | Non-institutional Investors | Retail Investors |
| No of shares (m) | 3.1 | 0.9 | 2.2 |
| % of total net offer size** | 50% | 15% | 35% |
| Minimum Bid/Application size | Such number of equity shares so that the bid amount exceeds Rs 200,000 | Such number of equity shares so that the bid amount exceeds Rs 200,000 | 6 shares |
| Maximum Bid/Application size | Not exceeding issue size | Not exceeding issue size | Rs 200,000 in multiples of 6 shares |
* The Company may allocate 30% of the QIB portion to Anchor Investors on a discretionary basis (1/3rd of which will be reserved for domestic mutual funds);
** 0.25 m shares are reserved for employees, hence total net offer is 6.2 m shares |
- To carry out the divestment of equity shares by the sellings (Financial Technologies (India) Limited, State Bank of India (Equity), GLG Financials Fund, Alexandra Mauritius Limited, Corporation Bank, Bank of Baroda and ICICI Lombard)
- To achieve the benefits of listing
| Business Multi Commodity Exchange of India Ltd (MCX) is the leading electronic commodities exchange in India, based on value of commodity futures contracts traded. It offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, energy, and a number of agri-commodities on its platform. Promoted by FTIL, the company started its operations, to facilitate nationwide online trading, clearing and settlement operations of commodities futures transactions, after getting permanent recognition from the Government of India for the same in September, 2003. The promoter company, FTIL is a software developer and a technical service provider of automated electronic solutions in the areas of finance and technology like foreign exchange, commodities and equities. MCX sources exchange related support infrastructure and software from FTIL. As of December 31, 2011, MCX had 2,153 members on its exchange's platform, with over 296,000 terminals including CTCL (Computer to Computer Link) spread over 1,572 cities and towns across India. The company commands more than 80% of the Indian commodity futures industry in terms of the value of commodity futures contracts traded. The company generates revenues from transaction fees, membership admission fees, annual subscription fees and terminal charges. More than 95% of total revenue is contributed by transaction fees. In the past three years (FY09-FY11), the total value of commodity futures contracts traded on the company's exchange has grown at a compounded average growth rate (CAGR) of 46%. During the same period, its revenues and adjusted net profits have grown at compounded average growth rates (CAGR) of 32% and 30% respectively.
Revenue break-up
| FY09 | FY10 | FY11 | 9MFY12 |
| Transaction fees | 87.6% | 91.9% | 94.8% | 96.1% |
| Membership Admission fees | 5.0% | 2.4% | 1.0% | 1.0% |
| Annual subscription fees | 6.4% | 4.7% | 3.7% | 2.5% |
| Terminal charges | 1.1% | 0.9% | 0.6% | 0.4% |
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| Key management personnel |
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Mr Lambertus Rutten (Managing Director and Chief Executive Officer) is a veteran in the field of commodity risk management and structured finance as well as on commodity price risk management. He holds a Master's degree with Honours in International Economic Management from Tilburg University, Netherlands. Before joining MCX, he had worked as the chief of finance, risk management and information in the commodities branch of the United Nations Conference on Trade and Development (UNCTAD), Geneva. He also holds directorship in Bourse Africa and Swiss Futures & Options Association Mr Venkat Chary, Chairman & Non-Executive Independent Director, is a retired IAS (Indian Administrative Services) officer. He is a former Chairman of the FMC (Forward Markets Commission), Government of India. He was also a member of the Maharashtra Electricity Regulatory Commission. He holds several academic degrees such as a Bachelor's degree in Law, Master's degree in Commerce, and a Post Graduate Diploma in Economics and Finance. Mr Jignesh P. Shah, Vice Chairman & Non Executive Non Independent Director, is promoter of FTIL group companies. He has been a director of the company since 2003. He has over 20 years of experience in creating and operating technology-centric financial exchanges such as those for stocks, commodities, currencies and bonds. Before promoting FTIL, he was working with Bombay Stock Exchange (BSE) where he was responsible for designing and implementing the technology platform of the exchange. He has done a Bachelor's degree in Engineering from Mumbai University.
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| Sector |
| Futures contracts are derivative products that provide means for hedging and asset allocation and are prevalent in nearly all sectors of the global economy. The asset underlying futures contracts could be a physical asset (such as an agricultural commodity) or a financial asset (such as interest rates, foreign exchange products and stock indices).There are over 30 commodity futures and options exchanges worldwide that trade commodities ranging from energy, metals, agriculture to livestock in many countries including the United States, China, Japan, Malaysia and the United Kingdom. The global commodity derivative market has experienced tremendous growth over the past decade. This strong growth could be attributed to increasing sophistication of trading strategies that have led to greater use of derivatives for hedging and speculation and the emergence of electronic high frequency trading. Increased and innovative product variety, greater participation of retail clients and the increased relevance of emerging economies have also played a great role in the growth of the commodity futures industry. In India, there are currently 21 commodity exchanges and associations which are recognised by the Government of India and authorised to organise and regulate futures trading in various commodities. However, top five players, MCX, NCDEX, NMCE, ICEX and ACE accounts for more than 99% of total industry. The industry is regulated by Forward Markets Commission (FMC), a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. FMC is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act (FCRA), 1952. Commodity futures trading in India has grown at a fast clip since the Government of India issued a notification on April 1, 2003 permitting futures trading in commodities. The total value of commodities futures traded in India in the FY11 was 119,489 bn, representing growth of approximately 90-fold from the value of commodity futures contracts traded in the FY04. Commodity futures trading volumes have risen at a CAGR of 90.9% between FY04 and FY11. At present, over 60 commodities futures have been approved by the FMC for trading. Gold, silver, crude oil, copper, zinc and nickel contribute more than 85% of the total market.
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The Indian commodity derivative market is still in nascent stage. So far, only futures are allowed for trading. Permission for commodity options is still under consideration of the Indian parliament. Options trading volumes in the global derivatives markets constitute around 50% of the total futures and options volumes. Hence, option trading may be one of the biggest growth drivers for the industry in the future, if the government of India allows for the same. In addition to that, the Government of India is also considering permitting banks, mutual funds and foreign institutional investors to trade in India's commodity futures markets. The entry of these new market participants may lead to increases in the trading volumes of commodity futures in India. The growth of the overall economy in India is expected to drive the underlying demand for commodities. The increase in physical market volumes would increase the hedging requirements of industry players, which influences derivative trading volumes. With technological advancement, availability of market information increases and increasing awareness regarding the benefits of hedging, the industry is set to grow in the future. |
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MCX - A behemoth among Indian Exchanges: MCX is the leading commodities exchange in India based on value of commodity futures contracts traded in metals, energy and certain agricultural commodities. It commands more than 80% of the Indian commodity futures industry in terms of the value of commodity futures contracts traded. It is 5th largest commodity futures exchange globally in terms of the number of contracts traded and were among the leading commodity exchanges in the world in terms of trading volumes of certain commodities. It is the largest silver exchange, the second largest gold, copper and natural gas exchange and the third largest crude oil exchange in the world. This leadership position in these products gives the company a definite competitive advantage in terms of liquidity. Liquidity is self-sustaining and sticky in nature which helps restrict competition. Also, unlike stocks, commodity future contracts are not fungibles. It means that contracts created by MCX are traded and cleared by MCX itself. This non-transferability of the contracts creates a great moat for the company as it is the market leader. All this is well reflected in the fact that despite growing competition in this space, the company has been successful in defending its market share. Going forward, this would help the company to grow with the growth in the overall industry. |
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| Asset light business model: Globally, exchanges are low capex and high dividend paying business models. The exchanges pay dividend as high as 90% of their net profits. MCX has been also paying dividend consistently. However, as the company is in the growth mode, it has not paid that kind of high dividends in the past. No doubt, the business model is company is highly scalable and have the potential to generate better margins at greater volumes. The company has made significant investments in developing its fixed operating infrastructure, including technology systems, to support anticipated growth and increase in the demand. Considering non-linearity of the business which would lead to higher profitability and sound growth prospects, the company is expected to pay high dividends in future. |
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| Strong management team: MCX's board of directors and management team are well experienced in the exchange industry and application of technology in this sector. Mr Jignesh Shah, vice chairman of the company, is an old and experienced hand in the Indian exchange business. He was a part of a part of the BSE's automation team that designed and implemented BSE's online trading system known as BOLT. Mr Lambertus Rutten, the managing director and CEO of the company, has sixteen years of experience working for the United Nations Conference on Trade and Development and the World Bank, where he was responsible for programmes on commodity exchanges, risk management and finance. Other directors are also having experience of working with different stock exchanges, banks and different regulatory bodies such as SEBI (Securities and Exchange Board of India) and FMC. The knowledge and experience of the management team enables the company respond to market opportunities, adapt to changes in the regulatory environment and bring innovations to the company's product folio and functioning. |
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| Bellwether in product and service Innovation: One of the biggest strength of the company is its ability to introduce new and innovative products, i.e. commodity future contracts, and services on its exchange. The company has been pioneer in offering futures trading in steel, crude oil, and almond in India. In June 2005, the company launched MCXCOMDEX, India's first real time composite commodity futures index. It also introduced several other indices related to agriculture, metal, energy and rain. The company was the first exchange in India to initiate evening sessions to synchronize with the trading hours of global exchanges in London, New York and other major international markets. The company introduces several mini contracts in Zinc, Lead, Aluminium and Silver. Coming up with new future contracts seems to be habit of the company. All this clearly indicates company's focus on growth through innovations. This trend would help the company keep its growth momentum going forward. |
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| Strong technological infrastructure and networks of alliance: The success of an electronic exchange is highly dependent of its technological infrastructure. The electronic trading platform is provided by the company's promoter FTIL, a leading technology company for exchanges. With the constant technology upgrades and variations as well as regulatory changes, the company needs to change its systems. And here support of FTIL comes very handy. The technical expertise and experience of FTIL enables MCX to obtain speedy and efficient technology solutions, such as customisation and development of new software for new products and services. Besides technological support, in commodity exchange business, other integrated infrastructure is required as well for delivery based trading. The group company, National Bulk Handling Corporation (NBHC), is a national warehousing and supply chain Company that provides warehouse and collateral management services and implements quality systems for receipt, storage, fumigation, product classification, weight certification, as well as out-loading services for commodities. This creates a good synergy arising from the physical settlement of commodity futures contracts traded on the company's exchange The company has also several international alliances with a number of exchanges such as the London Metal Exchange, the New York Mercantile Exchange, the LIFFE Administration and Management (under renewal), the Baltic Exchange Limited, Shanghai Futures Exchange and Taiwan Futures Exchange. This helps the company increase its market presence and innovate new products. |
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Change in regulatory environment: The commodities trading industry has been and continues to be subject to strict regulatory requirements and scrutiny. As such, MCX too face the risk of changes in laws, regulations or governmental policies or taxation which may diminish the trading volumes. Unlike Securities Transaction Tax (STT), in this industry there is still no Commodity Transaction Tax (CTT). There are states which do not levy any stamp duty as well. In the event of change in these kinds of favourable scenario, the trading volumes may get hampered. However, with the growth of overall market and tremendous opportunity to penetrate the Indian market, the company's business should not be affected much. |
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| Delay in FCRA amendments: The industry is waiting for FCRA amendment to allow trading in commodity options. Also, the industry is expecting government's nod on permitting banks, mutual funds and foreign institutional investors to trade in India's commodity futures markets. In case it does not come in the near future or does not materialize any time, the growth momentum of the whole industry would not be able to witness the spectacular growth rates of past, going forward. |
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| Intense competition: The competition is growing in this industry by the day. Despite the market leadership position, the company is facing pressure on its pricing. This clearly reflects in the fact the growth rate in income from operation (a CAGR of 32% over FY09-FY11) is not in line with the growth rate of the total turnover (a CAGR of 47% over FY09-FY11) for the company. The transaction fee is coming under pressure due to growing competition in this space. So far, the company has been able to defend its leadership position in terms of market share. However, this trend is hurting the profitability of the company. Going forward, growth in the topline and operating leverage would help the company to protect its margins. |
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| Profit & Loss (Rs m) | FY09 | FY10 | FY11 | 9MFY12 |
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| Income from operations | 2,124 | 2,874 | 3,689 | 4,023 |
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| Operating expenditure | 1,360 | 1,458 | 1,771 | 1,418 |
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| EBITDA | 764 | 1,416 | 1,918 | 2,605 |
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| EBITDA Margin | 36.0% | 49.3% | 52.0% | 64.8% |
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| Depreciation and Amortisation | 200 | 247 | 247 | 204 |
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| EBIT | 565 | 1,168 | 1,671 | 2,401 |
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| EBIT Margin | 26.6% | 40.6% | 45.3% | 59.7% |
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| Interest | 1.8 | 0.4 | 0.2 | 0.0 |
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| Other Income | 806 | 694 | 787 | 722 |
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| Exceptional items | 728 | 1,369 | - | - |
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| Profit before tax | 2,097 | 3,231 | 2,458 | 3,122 |
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| Tax | 522 | 1,024 | 727 | 917 |
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| Effective tax rate | 24.9% | 31.7% | 29.6% | 29.4% |
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| Net profit after tax before share of profit of Associate | 1,574 | 2,207 | 1,731 | 2,205 |
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| Share of profit of Associate | 0.4 | 3 | 3 | 1 |
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| Prior period adjustments | 14 | (2) | 29 | (27) |
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| Net profit | 1,588 | 2,208 | 1,763 | 2,180 |
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| Adjusted Net Profit | 1,042 | 1,273 | 1,763 | 2,180 |
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| Net Margin | 74.8% | 76.8% | 47.8% | 54.2% |
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| Adjusted Net Margin | 49.0% | 44.3% | 47.8% | 54.2% |
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| Fully diluted EPS | 31.1 | 43.3 | 34.6 | 42.7 |
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| Estimated annualised EPS for FY12 | | | | 57.0 |
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| Proposed dividend | 203.99 | 203.99 | 254.99 | - |
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| Dividend payout ratio | 13% | 9% | 14% | 0% |
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| Balance Sheet (Rs m) | | | | |
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| Net Fixed Assets | 2,089 | 1,928 | 1,953 | 1,930 |
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| Investments | 4,698 | 6,170 | 8,237 | 10,958 |
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| Current Assets, Loans and Advances | 4,872 | 4,191 | 4,810 | 3,837 |
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| Liabilities and Provisions | 6,722 | 5,321 | 6,513 | 5,987 |
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| Total Assets | 4,937 | 6,968 | 8,488 | 10,739 |
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| Net Worth | 4,937 | 6,968 | 8,488 | 10,739 |
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| Return on Equity (RoE) | 32.2% | 31.7% | 20.8% | 20.3% |
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| Adjusted RoE | 21.1% | 18.3% | 20.8% | 20.3% |
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| Estimated annualised RoE for FY12 | | | | 25.3% |
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Comparative analysis
| Parameters | MCX (FY11) | HKEX(CY10) | CME Group (CY10) | ASX (FY11 - June YE) | NASDAQ OMX (CY11) |
| Operating Margin | 45.3% | 83.9% | 61.0% | 61.6% | 19.7% |
| Net Profit Margin | 47.8% | 71.0% | 31.7% | 57.6% | 12.4% |
| Return on Equity | 20.8% | 58.1% | 4.7% | 11.7% | 8.4% |
| Dividend Payout (%) | 14% | 89.7% | 32.1% | 90.9% | 0.0% |
| Valuations | | | | | |
| Price to earnings (based on TTM EPS*) | 18.1 | 29.2 | 15.5 | 15.0 | 13.5 |
| Price to book value (based on latest book value) | 4.6 | 0.4 | 0.9 | 1.8 | 1.1 |
| Market capitalization (US$ bn)** | 1.1 | 20.3 | 19.6 | 5.8 | 4.7 |
| Dividend Yield | 0.5% | 2.9% | 1.6% | 6.0% | 0.0% |
Note- Share price for MCX is taken as the higher end of the offered price band which is Rs 1032
* For MCX, EPS of 9MFY12 has been annualized,
** As on 17th Feb, 2012
Currently, listed global exchanges around the world trade at an average price-to-earnings (P/E) multiple of around 17-18. However, matured players such as CME group, ASX and NASDAQ OMX trade at much lower valuations, a P/E of around 14-15. Exchanges in the Asian markets command higher valuations as growth prospect is much higher in this region. Please note that the Hong Kong Stock Exchange (HKEX) is not a commodity exchange but a stock exchange and its fundamentals may not be exactly comparable to that of MCX. At the higher level of the offer price of Rs 1032 per share, MCX's IPO has been priced at a multiple of 18.1 times its FY12E earnings. Comparing it with the valuations of mature exchanges, this obviously does not provide much comfort to long term investors. No doubt, MCX has a fairly robust business model. In addition, if FCRA amendments come and trading of commodity options starts on Indian commodity bourses, it would boost the turnover of the commodity derivative market. Also, if the government of India permits banks, mutual funds and foreign institutional investors to trade in the Indian commodity futures markets, it would help continue the growth momentum of the whole market. MCX, being a leader, is expected to reap the maximum benefits in that scenario. However, there is no certainty when all this would happen. Worst case scenario, these amendments may never see the light of the day. The current valuations leave very little on the table for the long term investors in terms of expansion of the market multiples. The valuation multiple at the higher level of the proposed price band seems to have factored in most of the near term upsides. There is no certainty on the issue of the proposed FCRA amendments. Considering all these, we recommend you to 'Avoid' the issue. It would be safer for retail investors to invest in the company once there is more margin of safety in valuations and visibility in dividend payouts and long term sustainable margins.
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