The shares of (India) may be up 50 per cent from the low of Rs 518 in the month of December, but there is room for further upside. The stock has gained the Street’s attention after talk of the Multi Commodity Exchange (MCX) getting listed in the current month got louder.
Financial Technologies (FT) currently holds 31.18 per cent in MCX and aims to reduce this to 25 per cent, in line with the new guidelines of the Forward Markets Commission on the equity structure for national commodity exchanges. It was recently given additional time to dilute its stake, by the end of March 2012, which has increased the Street’s confidence about the Initial Public Offer (IPO) hitting the primary markets in February.
“There is certainly room for further appreciation in the share prices of FT, though part of the valuations of MCX is already in the price. A lot will also depend on the pricing of the MCX IPO. Apart from the latter trigger, investors can anyway hold the stock for the long term, given that the company has a lot of properties in the form of stake in some of the leading exchanges (particularly in India) and financial software which could unlock further value,” says Deven Choksey, managing director of K R Choksey.
| WHAT MCX’S IPO MEANS FOR FT | ||
| Probable valuation (Rs cr) | 5,000 | 6,000 |
| No. shares (cr) | 5.1 | 5.1 |
| Per share value (Rs) | 980 | 1,176 |
| FT stake (%) | 31.2 | 31.2 |
| FT stake value (Rs cr) (A) | 1,559 | 1,871 |
| Current M-Cap of FT (Rs cr) | 3,527 | 3,527 |
| (A) as % of FT’s M-Cap | 44.2 | 53.0 |
| UNDER PRESSURE | ||||
| In Rs crore | FY10 | FY11 | 9M’ FY12* | % chg |
| Sales | 310.9 | 330.9 | 295.8 | 21.6 |
| PBIDT | 453.1 | 63.5 | 254.5 | 8.2 |
| PAT | 344.4 | 91.9 | 195.3 | -6.4 |
| EPS (Rs) | 73.3 | 18.6 | 42.4 | -6.4 |
| * For nine months ending December 2011 % change is year-on-year Standalone financials of Financial Technologies (India) Source: CapitaLine Plus | ||||
Business, valuations
MCX would be the first exchange to get listed in India. According to Bloomberg, globally, listed exchanges are currently trading at an average of five times their book value and about 18 times their trailing earnings.
Experts believe that given the size of the growth opportunity and its positioning in the commodities market, MCX, compared to its global peers, could enjoy relatively premium valuations.
In fact, the growth could remain robust for quite some time, as many of MCX’s businesses are in a nascent stages. Its record and higher market share also provide some confidence. So do the margins (return on equity of 32 per cent), which are superior in the case of MCX.
These factors are also a reason that rating agency Crisil has given the highest grading of five (out of five) to the IPO. The grade reflects MCX’s leadership in the commodity futures market over four years, with 82 per cent of overall traded turnover in 2010-11.
It is a leader in the trading of commodities like bullion, crude oil, copper and natural gas (85 per cent of traded turnover in FY11).
From a global benchmark perspective, the valuations of MCX work out to Rs 5,700-6,000 crore. Even if one were to consider the allotment price of shares to institutional investors like Citigroup in September 2007 (Citi had paid Rs 1,050 a share for 1.95 million shares, equivalent to a five per cent stake in MCX totalling Rs 205 crore, at a time when Sensex was 16,000-17,000), it translates into a valuation of Rs 4,100 crore.
MCX is coming out with an offer for sale wherein some existing investors, including Financial Technologies, are aiming to sell a part of their holding in the company.
Assuming the various valuation estimates and that MCX intends to offer about 6.4 million shares (12.6 per cent of total equity), it translates into an IPO size of Rs 640-768 crore. While FT’s stake in the MCX works out to Rs 1,500-1,900 crore or 44-53 per cent of FT’s current market capitalisation of Rs 3,530 crore, the latter would be garnering Rs 262-315 crore from the stake sale. These funds could then be used for investing in growing existing businesses.
Other businesses
Even after a surge in the share price of FT, analysts believe there is room for appreciation in valuations. After subtracting the value of MCX, the market is valuing FT’s core business at seven to nine times its 2011-12 earnings (based on annualised nine months’ earnings ending Dec-ember 2011), which looks attractive.
The remaining value of FT is on account of equity holding in various exch-anges, as well as software development, which again caters to the needs of stock exchanges and the trading community.
While valuation of its equity stakes is influenced by market conditions and the growth in each of those entities, the software business is expected to grow at a steady pace and add further value to FT.
