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India Equity Research Reports, IPO and Stock News
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Largest commodity exchange in India: MCX is the leading commodities
exchange in India based on the value of commodity futures contracts traded &
the fifth largest commodity futures exchange globally (FIA Survey), in terms of
the number of contracts traded.
�� Global recovery and Asia Pacific dominance: As a premier Indian Commodity
Exchange, with product suites across major commodity assets, MCX is well
positioned to benefit from the growing popularity of the commodity market and
the ongoing global economic recovery. A broadening importance of Asia Pacific
as a global commodity market also should support the volume growth.
�� Strong revenue growth with better return ratios: MCX has grown at a CAGR of
~35%, with EBITDA CAGR of 68% in the last four years and now ranked fifth in
terms of traded volumes. Moreover, MCX RoE for FY12 is 27% (annualized
9MFY12), much higher compared to peers like CME (5.5%), ICE (17.5%), and
NASDAQ OMX (9.4%).
�� Valuation and Recommentdation ‐ Growth not priced in: MCX is offering 6.4m
equity shares at a price band of Rs860-1,032 through an offer for sale, valuing
the business at US$877m to US$1,052m (Rs44bn to Rs53bn). In the current price
band, the company is valued at 15-18x FY12 earnings (pro-forma). The company
valuation is largely in-line with global commodity exchanges’ (CME, ICE, CBOE,
NASDAQ OMX) average of 16-17x FY12 earnings estimate (Bloomberg).
However, the growth and return ratios of MCX is ahead of global peers. We
recommend “Subscribe” to the IPO, but urge encashing 20‐30% gain on listing.
�� Risk to the business model: Upside Risk: 1) Deregulation and inclusion of more
agricultural commodities for exchange trading 2) Strong GDP growth 3) Allowing
commodity stocks’ option and futures at MCX. Downside Risk 1) Imposition of a
Commodity Transaction Tax 2) The concentration risk is high - four commodities
form nearly 70-80% of MCX trading volume 3) Likely competition from global
commodity exchange.
About the Company
MCX is the leading commodities exchange in India based on the value of commodity
futures contracts traded & the fifth largest commodity futures exchange globally (FIA
Survey), in terms of number of contracts traded.
According to FMC, the total value of commodity futures contracts traded on MCX for
9MFY12, FY11, FY10 constituted 87.3%, 82.4% & 82.3%, respectively, of the India
commodity futures industry. Their operations are sustained by the exchange related
support infrastructure and software that is sourced from their Promoter (FTIL). As of
December 31, 2011, they have 2,153 members with ~296,000 terminals, including
CTCL spread over 1,572 cities in India.
They derive their income primarily from,
�� Transaction fees with respect to the trades executed on the exchange
�� Annual Subscription fees
�� Member admission fees
�� Terminal charges
�� Proceeds of sale & dividends from investments, &
�� Interest from Bank Deposits
About the Offer
The objects of the offer are to achieve the benefits of listing on the BSE & provide
liquidity to the existing shareholders. It is a pure offer for sale & the company would
not receive any proceeds from the offer. MCX is offering 6.4m equity shares at a
price band of Rs860-1,032 through an offer for sale, valuing the business at
US$877m to US$1,052m (Rs44bn to Rs53bn). The key shareholders who are
tendering their shares are Financial Technologies, promoter of MCX, with 2.6m
shares, State Bank of India with 2.1m shares and GLG Financials Fund with 0.8m
shares. The remaining 0.9m shares are being offered by Alexandra, Bank of Baroda,
ICICI Lombard and Corporation Bank. Shareholding Pattern Post IPO:
Indian Commodities Market
There are currently 21 commodity exchanges recognized by FMC in India offering
trading in over 60 commodity futures with the approval of FMC. In FY09, FY10, FY11,
the total value of commodities traded on commodity futures exchanges in India was
Rs52,489.57bn, Rs77,647.54bn & Rs119,489.42bn, respectively. There are currently
five electronic multi-commodity national exchanges which are recognized by the
Govt. of India, namely:
�� Multi Commodity Exchange of India Limited (“MCX”) (Mumbai)
�� National Commodity & Derivatives Exchange Limited (“NCDEX”) (Mumbai)
�� National Multi Commodity Exchange Limited (“NMCE”) (Ahmedabad)
�� Indian Commodity Exchange Limited (“ICEX”) (Gurgaon)
�� Ace Derivatives & Commodity Exchange (“ACE”) (Ahmedabad)
Industry Growth in India
Commodity futures trading in India has grown since the Government of India issued
a notification on April 1, 2003 permitting futures trading in commodities. Commodity
futures trading volumes have risen at a CAGR of 90.9% between FY04 & FY11.
There are currently over 60 commodities futures that have been approved by FMC
for trading during the calendar year 2011 with gold, silver, crude oil, copper, zinc,
nickel & natural gas comprising the majority of the trading turnover for FY11 and
9MFY12
Global Derivatives Market – Snapshot
In 1984, total trading volume for futures & options contracts traded globally was
188m contracts (Source: FIA, FIA Report). In 2010, total contract volume had grown
to 22.3bn, representing a CAGR of ~20% for the past 26 years. Moreover, futures and
options contracts grew by 25.6% YoY in 2010.
For the first time ever in 2010, Asia-Pacific accounted for the largest share of global
volume traded. Total volume on the derivatives exchanges in the region reached
8.86bn contracts in 2010, an increase of 42.8% YoY. North America (leader in 2009)
ranked second with 7.17bn contracts traded in 2010, a growth of 12.8 % YoY.
The market witnessed public listing of the Chicago Mercantile Exchange (“CME”), the
Chicago Board of Trade, the International Securities Exchange, the New York Stock
Exchange (“NYSE”) & the New York Mercantile Exchange (“NYMEX”) in the last
decade. Deregulation has enabled exchanges to consolidate, which improved the
exchanges’ cross-border trading capabilities as well as broadened their range of
products and enhanced liquidity to gain operating efficiencies.
Investment Argument
The turmoil in the Western Economies yielded weak derivatives volume growth in
2009 due to widespread corporate deleveraging and a decreased need to hedge.
However, in developing countries, particularly in Asia, derivatives usage continues to
exhibit robust growth as emerging economies attract global trade flow and drive
demand for risk management. We expect this trend to continue, driven by continued
strong GDP growth in Asia Pacific market markets. MCX’s strong presence in India
positions it uniquely to capture these opportunities.
Global recovery and Asia Pacific dominance
As a premier Indian Commodity, with wide-range of product suites across all major
commodity assets, MCX is well positioned to benefit from the growing popularity of
commodity market and the ongoing global economic recovery. A broadening
importance of Asia Pacific as a global commodity market also should support volume
growth. Despite volatile commodity volume, Asia Pacific witnessed strong growth.
Strong growth & better returns ratios: Rev. CAGR‐~35%, RoE‐27%
MCX has delivered strong growth over the last four years compared to its peers,
growing at CAGR of ~35% (in terms of revenue) and now ranked 5th in terms of
traded volume. EBITDA has shown a CAGR of ~65% over the last four years. The
company has stronger return ratios when compared to other commodities exchange
in the world.
We believe that stronger growth profile along with expanding margin (due to
scalable technology platform) would help MCX command premium valuations
compared to global commodities’ exchange.
Risk to recommendation
Upside Risk
�� Deregulation and inclusion of more agricultural commodities and participants
for commodity exchange trading: Indian regulations currently do not permit
options trading in commodities, which when permitted may result in increased
trading activity on MCX. FMC also regulates the type of participants who can
trade on the commodity futures exchanges. FIIs, Banks & Mutual funds cannot
trade in commodity exchanges. If allowed, may result in increased trading
activity.
�� Strong GDP growth: Global GDP growth forecast continues to remain under
downward pressure. A steady recovery in the global economy would boost the
sentiment for commodity trading.
�� Allowing commodity stocks’ futures and options trading: Average daily
commodity turnover of MCX is Rs600-700bn. If we exclude the turnover of
indices (NIFTY) and options (call/put) from NSE turnover, MCX’s turnover is 2-3
times more than NSE. Currently, options and indices trading are not available in
the Indian commodity exchange. Allowing such trades could boost volumes at
MCX.
Downside Risk
�� Imposition of a Commodity Transaction Tax: Imposition of a Commodity
Transaction Tax (CTT) will have a retrograde effect on the commodity futures
market. The business could migrate to unconventional means.
�� High concentration risk is high: Four commodities form nearly 70-80% of MCX
trading volume 3) Likely competition from the global commodity exchange, so if
the commodity cycle turns, you could see revenues dip, going ahead.
�� Competition from the global commodity exchange: Currently, MCX commands
87% of the market share in the business. However, entry of global commodity
exchange in India, with competitive technologies, could change the trading
landscape.
Valuations in‐line with the commodity exchanges, but
discount to emerging market exchanges valuation
MCX is planning to raise Rs6.63bn through offer for sale, with a price band of Rs860-
1,032. At the price band of MCX, the company is asking for valuation of 15-18.1x
FY12 earnings estimate (annualized 9MFY12). The valuation is in line with the
currently trading commodity exchanges. However, compared to emerging market
exchanges, the valuation is at a discount.
Strong revenue growth, along with margin expansion, gives room for P/E in-line with
other Emerging Market Exchanges. We rate IPO as “Subscribe”.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Largest commodity exchange in India: MCX is the leading commodities
exchange in India based on the value of commodity futures contracts traded &
the fifth largest commodity futures exchange globally (FIA Survey), in terms of
the number of contracts traded.
�� Global recovery and Asia Pacific dominance: As a premier Indian Commodity
Exchange, with product suites across major commodity assets, MCX is well
positioned to benefit from the growing popularity of the commodity market and
the ongoing global economic recovery. A broadening importance of Asia Pacific
as a global commodity market also should support the volume growth.
�� Strong revenue growth with better return ratios: MCX has grown at a CAGR of
~35%, with EBITDA CAGR of 68% in the last four years and now ranked fifth in
terms of traded volumes. Moreover, MCX RoE for FY12 is 27% (annualized
9MFY12), much higher compared to peers like CME (5.5%), ICE (17.5%), and
NASDAQ OMX (9.4%).
�� Valuation and Recommentdation ‐ Growth not priced in: MCX is offering 6.4m
equity shares at a price band of Rs860-1,032 through an offer for sale, valuing
the business at US$877m to US$1,052m (Rs44bn to Rs53bn). In the current price
band, the company is valued at 15-18x FY12 earnings (pro-forma). The company
valuation is largely in-line with global commodity exchanges’ (CME, ICE, CBOE,
NASDAQ OMX) average of 16-17x FY12 earnings estimate (Bloomberg).
However, the growth and return ratios of MCX is ahead of global peers. We
recommend “Subscribe” to the IPO, but urge encashing 20‐30% gain on listing.
�� Risk to the business model: Upside Risk: 1) Deregulation and inclusion of more
agricultural commodities for exchange trading 2) Strong GDP growth 3) Allowing
commodity stocks’ option and futures at MCX. Downside Risk 1) Imposition of a
Commodity Transaction Tax 2) The concentration risk is high - four commodities
form nearly 70-80% of MCX trading volume 3) Likely competition from global
commodity exchange.
About the Company
MCX is the leading commodities exchange in India based on the value of commodity
futures contracts traded & the fifth largest commodity futures exchange globally (FIA
Survey), in terms of number of contracts traded.
According to FMC, the total value of commodity futures contracts traded on MCX for
9MFY12, FY11, FY10 constituted 87.3%, 82.4% & 82.3%, respectively, of the India
commodity futures industry. Their operations are sustained by the exchange related
support infrastructure and software that is sourced from their Promoter (FTIL). As of
December 31, 2011, they have 2,153 members with ~296,000 terminals, including
CTCL spread over 1,572 cities in India.
They derive their income primarily from,
�� Transaction fees with respect to the trades executed on the exchange
�� Annual Subscription fees
�� Member admission fees
�� Terminal charges
�� Proceeds of sale & dividends from investments, &
�� Interest from Bank Deposits
About the Offer
The objects of the offer are to achieve the benefits of listing on the BSE & provide
liquidity to the existing shareholders. It is a pure offer for sale & the company would
not receive any proceeds from the offer. MCX is offering 6.4m equity shares at a
price band of Rs860-1,032 through an offer for sale, valuing the business at
US$877m to US$1,052m (Rs44bn to Rs53bn). The key shareholders who are
tendering their shares are Financial Technologies, promoter of MCX, with 2.6m
shares, State Bank of India with 2.1m shares and GLG Financials Fund with 0.8m
shares. The remaining 0.9m shares are being offered by Alexandra, Bank of Baroda,
ICICI Lombard and Corporation Bank. Shareholding Pattern Post IPO:
Indian Commodities Market
There are currently 21 commodity exchanges recognized by FMC in India offering
trading in over 60 commodity futures with the approval of FMC. In FY09, FY10, FY11,
the total value of commodities traded on commodity futures exchanges in India was
Rs52,489.57bn, Rs77,647.54bn & Rs119,489.42bn, respectively. There are currently
five electronic multi-commodity national exchanges which are recognized by the
Govt. of India, namely:
�� Multi Commodity Exchange of India Limited (“MCX”) (Mumbai)
�� National Commodity & Derivatives Exchange Limited (“NCDEX”) (Mumbai)
�� National Multi Commodity Exchange Limited (“NMCE”) (Ahmedabad)
�� Indian Commodity Exchange Limited (“ICEX”) (Gurgaon)
�� Ace Derivatives & Commodity Exchange (“ACE”) (Ahmedabad)
Industry Growth in India
Commodity futures trading in India has grown since the Government of India issued
a notification on April 1, 2003 permitting futures trading in commodities. Commodity
futures trading volumes have risen at a CAGR of 90.9% between FY04 & FY11.
There are currently over 60 commodities futures that have been approved by FMC
for trading during the calendar year 2011 with gold, silver, crude oil, copper, zinc,
nickel & natural gas comprising the majority of the trading turnover for FY11 and
9MFY12
Global Derivatives Market – Snapshot
In 1984, total trading volume for futures & options contracts traded globally was
188m contracts (Source: FIA, FIA Report). In 2010, total contract volume had grown
to 22.3bn, representing a CAGR of ~20% for the past 26 years. Moreover, futures and
options contracts grew by 25.6% YoY in 2010.
For the first time ever in 2010, Asia-Pacific accounted for the largest share of global
volume traded. Total volume on the derivatives exchanges in the region reached
8.86bn contracts in 2010, an increase of 42.8% YoY. North America (leader in 2009)
ranked second with 7.17bn contracts traded in 2010, a growth of 12.8 % YoY.
The market witnessed public listing of the Chicago Mercantile Exchange (“CME”), the
Chicago Board of Trade, the International Securities Exchange, the New York Stock
Exchange (“NYSE”) & the New York Mercantile Exchange (“NYMEX”) in the last
decade. Deregulation has enabled exchanges to consolidate, which improved the
exchanges’ cross-border trading capabilities as well as broadened their range of
products and enhanced liquidity to gain operating efficiencies.
Investment Argument
The turmoil in the Western Economies yielded weak derivatives volume growth in
2009 due to widespread corporate deleveraging and a decreased need to hedge.
However, in developing countries, particularly in Asia, derivatives usage continues to
exhibit robust growth as emerging economies attract global trade flow and drive
demand for risk management. We expect this trend to continue, driven by continued
strong GDP growth in Asia Pacific market markets. MCX’s strong presence in India
positions it uniquely to capture these opportunities.
Global recovery and Asia Pacific dominance
As a premier Indian Commodity, with wide-range of product suites across all major
commodity assets, MCX is well positioned to benefit from the growing popularity of
commodity market and the ongoing global economic recovery. A broadening
importance of Asia Pacific as a global commodity market also should support volume
growth. Despite volatile commodity volume, Asia Pacific witnessed strong growth.
Strong growth & better returns ratios: Rev. CAGR‐~35%, RoE‐27%
MCX has delivered strong growth over the last four years compared to its peers,
growing at CAGR of ~35% (in terms of revenue) and now ranked 5th in terms of
traded volume. EBITDA has shown a CAGR of ~65% over the last four years. The
company has stronger return ratios when compared to other commodities exchange
in the world.
We believe that stronger growth profile along with expanding margin (due to
scalable technology platform) would help MCX command premium valuations
compared to global commodities’ exchange.
Risk to recommendation
Upside Risk
�� Deregulation and inclusion of more agricultural commodities and participants
for commodity exchange trading: Indian regulations currently do not permit
options trading in commodities, which when permitted may result in increased
trading activity on MCX. FMC also regulates the type of participants who can
trade on the commodity futures exchanges. FIIs, Banks & Mutual funds cannot
trade in commodity exchanges. If allowed, may result in increased trading
activity.
�� Strong GDP growth: Global GDP growth forecast continues to remain under
downward pressure. A steady recovery in the global economy would boost the
sentiment for commodity trading.
�� Allowing commodity stocks’ futures and options trading: Average daily
commodity turnover of MCX is Rs600-700bn. If we exclude the turnover of
indices (NIFTY) and options (call/put) from NSE turnover, MCX’s turnover is 2-3
times more than NSE. Currently, options and indices trading are not available in
the Indian commodity exchange. Allowing such trades could boost volumes at
MCX.
Downside Risk
�� Imposition of a Commodity Transaction Tax: Imposition of a Commodity
Transaction Tax (CTT) will have a retrograde effect on the commodity futures
market. The business could migrate to unconventional means.
�� High concentration risk is high: Four commodities form nearly 70-80% of MCX
trading volume 3) Likely competition from the global commodity exchange, so if
the commodity cycle turns, you could see revenues dip, going ahead.
�� Competition from the global commodity exchange: Currently, MCX commands
87% of the market share in the business. However, entry of global commodity
exchange in India, with competitive technologies, could change the trading
landscape.
Valuations in‐line with the commodity exchanges, but
discount to emerging market exchanges valuation
MCX is planning to raise Rs6.63bn through offer for sale, with a price band of Rs860-
1,032. At the price band of MCX, the company is asking for valuation of 15-18.1x
FY12 earnings estimate (annualized 9MFY12). The valuation is in line with the
currently trading commodity exchanges. However, compared to emerging market
exchanges, the valuation is at a discount.
Strong revenue growth, along with margin expansion, gives room for P/E in-line with
other Emerging Market Exchanges. We rate IPO as “Subscribe”.
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