IPO: MULTI COMMODITY EXCHANGE OF INDIA

This IPO is a Must Have Commodity for Investors

The initial public offer of the Multi Commodity Exchange of India (MCX) offers retail investors an opportunity to become a part of India's growing commodity trading business at reasonable pricing. The company is the leader in its industry with a robust business model, a strong balance sheet and consistently high cash flows without any major capex in future. Investors are advised to subscribe to the IPO. 

IPO DETAILS Seven of the existing shareholders of the company, including the promoter Financial Technologies (FTIL), will be selling a total of 64.3 lakh shares. MCX won't be issuing any shares and hence no proceeds would accrue to the company. 

BUSINESS MCX is a de-mutualised commodity exchange, where ownership, management and membership are in different hands to ensure maximum transparency. It commenced operations in 2003 and has become the numero uno in India, attracting 87.3% of commodity futures value in the 9-month period ended December 2011. The company currently allows trading in 49 commodity futures across bullion, metals, energy and agriculture. It has the world's highest turnover in silver contracts, second largest in gold and the third largest in crude oil and copper.
Transaction fees paid by the members for execution of trades is the primary source of revenues for MCX and represented 81.5% of its total income in the 9-month period ended December 2011. Membership admission fees, annual subscription fees and terminal charges together represent 3.3% of total income while other income brought in 15.2%.
The company is entirely dependent on exchange-related support infrastructure and software sourced from its promoter FTIL.
MCX has a 15-member board of directors with one managing director, three representing promoters FTIL, four nominated by FMC and one nominee from NABARD and SBI each. 

GROWTH DRIVERS India's commodity trading market has expanded rapidly in the last few years with the advent of electronic exchanges. The average daily turnover of MCX jumped 3.5 times from Rs 14,900 crore in FY09 to Rs 51,400 crore in the 9-month period ended December 2011.
India currently doesn't allow trading in commodity options or indices. Similarly, FIIs, mutual funds and banks are not allowed to trade in India's commodity futures markets. Any regulatory changes in this regard would substantially boost traded volumes on MCX. 

FINANCIALS The company represents a high-cash generating, low-capex business and is debt free. Its net worth stood at around Rs 1,073.9 crore as on December 31, 2011. Out of this nearly Rs 700 crore is cash or investments. For the 9-month period ended December 2011, the company's operating profit margin was 64.8% and net profit margin 45.9%.
The company has maintained a continuous record of dividends since the first full year of operations. Since the company is not allowed to invest in non-related businesses and its own capex needs are limited, it will eventually become a high-dividend paying company. In the last four years, the company has distributed around 15% of its net profit and its current dividend yield would work out to around 0.6%. 

VALUATIONS MCX posted a net profit of Rs 218 crore in the nine months to December 2011. On an annualised basis, this translates into a price-to-earnings multiple (P/E) of 15.1 to 18.1 depending on the lower and upper IPO price bands. Similarly, the IPO band is 4.1 to 4.9 times the book value of MCX shares as on December 31, 2011. On both these valuation parameters, MCX fares favourably when compared with mature international exchanges like Nymex and ICE, more so due to India's potential for rapid growth in commodity trading.
    (Publisher's Disclosure — "Bennett,
    Coleman & Co Ltd and/or its subsidiaries hold 3.04% of the pre-offer
    share capital of MCX as on the date
    of filing of the DRHP with Sebi")