Crisil’s “five on five” rating for MCX IPO makes mockery of IPO grading. If the price band was not available at the time of grading as Crisil claims, how could it assign the highest rating for the IPO?
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OFFER AT A GLANCE |
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Name |
Multi Commodity Exchange of India Ltd |
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Offer Quantity |
64,27,378 shares of Rs 10 each |
|
% on Total Equity |
12.6% |
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Offer Price |
Rs 860 to Rs 1032 |
|
Offer Amount |
Rs 552.75 cr to Rs 663.31 cr |
|
Application Quantity |
6 & Multiples of 6 |
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Offer Opens |
February 22, 2012 |
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Bid/Offer Closes |
February 24, 2012 |
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Rated By |
CRISIL |
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Rating |
5 out of 5 |
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Lead Managers |
Edelweiss, Citigroup & Morgan Stanley |
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Registrars |
Karvy Computershare |
The Offer
The present offer (64.27 lakh shares) is not a fresh issue from the company but an `offer for sale’ by select shareholders viz. Financial Technologies India Ltd (41.1%), State Bank (32.9%), GLG Financials Fund (12.2%), Alexandra Mauritius (6.1%), Corporation Bank (3.8%), ICICI Lombard General Insurance Company (2.3%) and Bank of Baroda (1.6%).
Parentage
Though the ultimate promoters of Multi Commodity Exchange of India Ltd (MCX), Jignesh Shah & Associates, have been in the listed domain for more than a decade, they are going public for the first time now. The existing listed company of the group, Financial Technologies India Ltd (FTIL), has a different story.
Floated public as Worldwide Technologies Ltd during the 1995 primary market boom by a different promoter at an offer price of Rs 30 (Rs 45 for NRIs & OCBs), this company incurred losses post IPO and the price plunged to less than Rs 3 in 1997.
The company’s name was changed to Nods Worldwide Ltd in 1999. In 2000, another company, Electronic Broking Services Ltd, was merged with Nods Worldwide and the resultant company was renamed as e-Xchange on the Net Ltd. In 2000-01, Financial Technologies (India) Pvt. Ltd, originally incorporated as Jignesh Consultancy Services Pvt Ltd, was merged with e-Xchange on the Net Ltd and the name was changed into Financial Technologies (India) Ltd.
Business
The Mumbai-based MCX is an electronic commodity futures exchange. Set up by FTIL as a de-mutualised exchange, MCX has permanent recognition from the Government of India to facilitate online trading, clearing and settlement operations for commodity futures across the country. MCX electronic trading platform is supplied by its promoter, FTIL.
Around 85% of MCX turnover is reportedly through Metal and Energy commodities which are benchmark to international prices. MCX’s share in the overall commodities market in FY 11 was put at 82%. It was claimed to be the largest silver exchange; the second largest gold, copper and natural gas exchange; and the third largest crude oil exchange in terms of the number of contracts traded in each of these commodities.
MCX’s sources of operating income are Transaction Fees, Membership Admission Fees, Annual Subscription Fees and Terminal Charges. Transaction Fee is the largest component (nearly 90%) of the Operating Revenue.
Financial Track
MCX’s operating revenue grew from Rs 212 cr in FY09 to Rs 369 cr in FY11. Its EBITDA moved up from Rs 157 cr in FY09 to Rs 270 cr in FY11 with margins surging from 54% to 60%. The company’s net profit stood at Rs 173 cr in FY11 against its equity base Rs 51 cr yielding an EPS of Rs 34. At the end of last Fiscal, the company’s reserves amounted to around Rs 800 cr and the book value of the share worked out to Rs 166. The company posted a return on net worth of over 21% in last three fiscals.
Prospects
The commodity futures market in India is yet to develop fully, though strong economic growth, introduction of new products and retail participation has driven commodities futures over last few years. According to Crisil report, the growth base would continue in view of various changes expected on the regulatory front. It claims that once the amendment to the Forwards Contracts (Regulation) Act is made in due course, trading in option and indices is expected to drive the volumes on the exchange in line with global trend.
Since options constitute a significant portion of the traded volumes in commodity derivatives in the global arena, if the Indian Government allows foreign and domestic institutions including banks to participate in commodity futures trading, the scope for MCX would vastly improve as currently traders and brokers are the main participants on the exchange.
Nevertheless, while acknowledging the growth potential, one should not overlook the fact that the buoyancy in commodities market has also evinced interest of many new players. There are already four more national commodity exchanges (NCDEX, NMCE, ICEX and ADCE) in the country backed by more resourceful industrial houses/groups than FTIL. The growth of these new exchanges would not only eat into the market share of MCX (currently 82%) in the coming years but, could also dent the profit margin.
Valuation
Even though Crisil has awarded the maximum rating to MCX IPO, its disclaimer reads that the grading is a one time assessment of the current fundamentals and it did not comment on the issue price. Interestingly, Crisil’s note reveals that the price-band was not available at the time of grading!
Without considering the issue price, Crisil has assigned the highest rating for the IPO. How does one justify a price of Rs 860 or more for Rs 10 paid-up share of MCX? Also, when the main offeror’s cost of holding is only Rs 8, how they are out to charge such an exorbitant premium?
Historically, the company has reported ROE of about 24% during the last three years. At the market capitalisation implied by the book building price range, MCX will have to generate a PAT of Rs.1200 cr to deliver an ROE of 24%, which is nearly impossible.
There is no listed exchange in India with which MCX can be compared. But, a close look at the price of CME Group Inc, a leading exchange listed on the New York Stock Exchange, gives a feeling that MCX has overstretched in its valuation.
Whereas CME is discounted about 10 times its earnings, MCX has priced the offer 25 to 30 times. CME’s price to book-value is not even 1 but MCX is asking a P/BV of 5 to 6 times. Whereas CME’s price to revenue works out to 6 times, MCX’s P/R ratio amounts to 11 to 14 times. MCX’s EBITDA is discounted 16 to 20 times while CME has a multiple of only 9 times its operating earnings. Also, Indian market composite P/E is currently at less than 17x and P/BV is only 2.5x which makes MCX’s offer price too steep.
Interestingly, the largest offeror Financial Technologies India Ltd (FTIL), who is the main promoter of MCX, had acquired the shares over a period of nine years at an average cost of just Rs 8. Also, when Crisil has awarded the maximum rating to company’s fundamentals, the promoters are diluting their stake from 31% to 26%.
Nonetheless, considering the clout of the promoters, listing gains cannot be ruled out as MCX’s party is likely to last for some more time.
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HOW MCX INDIA COMPARES WITH CME, USA |
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PARTICULARS |
MCX, INDIA |
CME, USA |
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PERIOD |
FY 10-11 |
FY 11-12 |
CY 11 |
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MONTHS |
12 |
9 |
12 |
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|
Rs. Mln |
Rs. Mln |
USD MLN |
|
Income from operations |
3,689 |
4,023 |
|
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Total Income |
4,476 |
4,745 |
3,281 |
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EBITDA |
2,705 |
3,326 |
2,150 |
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Net Profit |
1,734 |
2,207 |
1,812 |
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Equity Capital |
510 |
510 |
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Net Worth |
8,489 |
10,739 |
21,552 |
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Book Value (Rs.) |
166.45 |
210.57 |
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EPS (Rs.) |
34.00 |
57.70 |
27.23 |
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Price (CME in USD) |
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|
293.98 |
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Market Capitalisation |
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|
19,630 |
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Lower end – Rs.860 |
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43,860 |
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Higher end – Rs.1032 |
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52,632 |
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Market Cap to Revenue |
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|
6.0 |
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Lower end – Rs.860 |
11.9 |
8.2 |
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Higher end – Rs.1032 |
14.3 |
9.8 |
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Market Cap to EBITDA |
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|
9.1 |
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Lower end – Rs.860 |
16.2 |
9.9 |
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Higher end – Rs.1032 |
19.5 |
11.9 |
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PE Ratio |
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|
10.8 |
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Lower end – Rs.860 |
25.3 |
14.9 |
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Higher end – Rs.1032 |
30.4 |
17.9 |
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P-BV Ratio |
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|
0.9 |
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Lower end – Rs.860 |
5.2 |
4.1 |
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Higher end – Rs.1032 |
6.2 |
4.9 |
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Investment Banker’s Track
The offer for sale is managed by three investment bankers viz. Edelweiss Financial, Citrigroup Global and Morgan Stanley India.
In last two years, Edelweiss managed ten issues of which only two are currently trading above the offer price. The other eight IPOs have inflicted a loss of 12% to 54%.
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Performance of Edelweiss Capital-associated IPOs in last two years |
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Sl. |
Issuer |
IPO |
FV |
IPO |
Listing |
3-Mon |
6-Mon |
Current |
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|
No. |
|
Date |
|
Price |
Gain% |
Gain% |
Gain% |
Price |
Gain% |
|
1 |
Man Infra |
18-Feb-10 |
10 |
252 |
38.2 |
27.7 |
34.7 |
131.25 |
-47.9 |
|
2 |
United Bank |
23-Feb-10 |
10 |
66 |
4.2 |
19.8 |
77.5 |
83.90 |
27.1 |
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3 |
NMDC |
10-Mar-10 |
1 |
300 |
-0.6 |
-11.4 |
-11.1 |
199.25 |
-33.6 |
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4 |
Mandhana |
27-Apr-10 |
10 |
130 |
2.8 |
31.2 |
101.8 |
251.15 |
93.2 |
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5 |
Hindustan Media |
5-Jul-10 |
10 |
166 |
14.0 |
8.0 |
-2.6 |
136.00 |
-18.1 |
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6 |
Electrosteel Steel |
21-Sep-10 |
10 |
11 |
2.3 |
-11.2 |
-12.5 |
7.40 |
-32.7 |
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7 |
Commercial Engr |
30-Sep-10 |
10 |
127 |
-11.6 |
-64.6 |
-67.7 |
58.85 |
-53.7 |
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8 |
Claris Lifesciences |
24-Nov-10 |
10 |
228 |
-9.7 |
-27.1 |
-29.3 |
146.50 |
-35.7 |
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9 |
MOIL |
26-Nov-10 |
10 |
375 |
24.4 |
1.3 |
-7.7 |
266.60 |
-28.9 |
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10 |
Future Ventures |
25-Apr-11 |
10 |
10 |
-17.0 |
-8.4 |
-13.0 |
8.75 |
-12.5 |
Citigroup was associated with six IPOs in last couple of years. Of these only Coal India has consistently quoted above the offer price since listing. The high profile SKS Microfinance has inflicted a loss of more than 85%.
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Performance of Citigroup Global-associated IPOs in last two years |
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Sl. |
Issuer |
IPO |
FV |
IPO |
Listing |
3-Mon |
6-Mon |
Current |
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No. |
|
Date |
|
Price |
Gain% |
Gain% |
Gain% |
Price |
Gain% |
|
1 |
NTPC |
3-Feb-10 |
10 |
201 |
2.0 |
1.8 |
-3.2 |
187.65 |
-6.6 |
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2 |
NMDC |
10-Mar-10 |
1 |
300 |
-0.6 |
-11.4 |
-11.1 |
199.25 |
-33.6 |
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3 |
SKS Microfin |
28-Jul-10 |
10 |
985 |
10.5 |
-18.9 |
-34.6 |
138.55 |
-85.9 |
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4 |
Coal India |
18-Oct-10 |
10 |
245 |
39.7 |
25.7 |
51.4 |
324.85 |
32.6 |
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5 |
Tata Steel |
19-Jan-11 |
10 |
610 |
2.6 |
0.7 |
-7.5 |
478.00 |
-21.6 |
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6 |
L&T Finance |
27-Jul-11 |
10 |
52 |
-3.9 |
-5.5 |
-7.0 |
52.50 |
1.0 |
Of the three Investment Bankers, Morgan Stanley’s record looks a shade better. Of the six IPOs, three are currently trading above the offer price.
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Performance of Morgan Stanley-associated IPOs in last two years |
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Sl. |
Issuer |
IPO |
FV |
IPO |
Listing |
3-Mon |
6-Mon |
Current |
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No. |
|
Date |
|
Price |
Gain% |
Gain% |
Gain% |
Price |
Gain% |
|
1 |
Hathway Cable |
9-Feb-10 |
10 |
240 |
-13.4 |
-22.5 |
-15.4 |
167.15 |
-30.4 |
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2 |
NMDC |
10-Mar-10 |
1 |
300 |
-0.6 |
-11.4 |
-11.1 |
199.25 |
-33.6 |
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3 |
Jaypee Infra |
29-Apr-10 |
10 |
102 |
-10.5 |
-18.9 |
-21.4 |
50.15 |
-50.8 |
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4 |
Eros Internation |
17-Sep-10 |
10 |
175 |
8.6 |
-10.5 |
-14.2 |
209.75 |
19.9 |
|
5 |
Oberoi Realty |
6-Oct-10 |
10 |
260 |
8.8 |
-5.2 |
-3.3 |
286.55 |
10.2 |
|
6 |
Coal India |
18-Oct-10 |
10 |
245 |
39.7 |
25.7 |
51.4 |
324.85 |
32.6 |
Concerns
- Promoters’ stake is too low (26%) to instill confidence
- Unjustifiable profiting by the promoter through the offer for sale
- P/E, P/BV, P/R and P/EBITDA ratios are too high to justify
- Crisil’s high rating does not consider the offer price
- Too many companies in the fold, 21 out of 28 companies are in loss
- Likely competition from more money-muscled players in the coming years
- Possible introduction of commodity transaction tax
- Frightening post-listing record of recent high-priced IPOs