MCX (Multi Commodity Stock Exchange) is opening its IPO (Initial Public Offer) on the 22nd of February 2012 and closing it on the 24th of February 2012. What should you do?
The MCX IPO will not add value to the company, though it will help existing shareholders to rake in the gains of listing. New shareholders have a lot of headwinds facing them including issues of promoter group bad investments and rising completion that could kill margins.
MCX is not for long term portfolios though short term gains are on the cards given market euphoria and the hype over the issue.
The salient features of the MCX IPO
Issue dates: 22nd to 24th of February 2012
Issue Price: Rs 860/- to Rs 1032/-
Expected cut off: Rs 1032/-
*Price earnings ratio at cut off: 17x
*Price to book at cut off : 4.5x
*Market cap at cut off: Rs 5260 crores
*Revenue to market cap at cut off: 9.5x
* Estimated full year 2011-12
What you should know about the company?
MCX is promoted by FTIL (Financial Technologies India limited), which will own 26% of the company post the IPO. FTIL and other institutional shareholders are selling their stake through this IPO. The details of the equity capital are:
Paid up capital: 50998369 equity shares
Shares on offer: 6427378 equity shares
Dilution of stake: 12.6%
MCX claims a market share of 87% as of end December 2011 in the commodities market in India. Its closest competitor is NCDEX, with around 9% market share. MCX has gained in market share over last year, despite more commodity exchanges competing with it.
Table 1. Market Share
Precious metals dominate trading volumes with 65% of total traded volumes. Silver contributes to 38% of the total turnover followed by gold at 27%. Other commodities with large turnover include crude oil and copper.
Chart 1. Commodity wise volume share
MCX projects itself as the fifth largest commodity exchange in the world in terms of volume of contracts traded.
MCX promoter company FTIL has invested in other businesses that is bleeding the company. FTIL has made losses for the financial year 2011 on the back of losses incurred in its numerous subsidiaries.
The promoter interest in MCX could give rise to corporate governance issues if FTIL uses MCX to cover its losses incurred in other businesses.
Commodity exchanges are sprouting on the back of rising volumes in India. New exchanges will drive down fees to lure traders and this will affect MCX going forward. It will struggle to maintain market share.
MCX-SX the currency futures exchange promoted by MCX and FTIL has been making losses for the last three years and it is expected to continue to make losses and this will eat into the company’s profit.
MCX was cash flow negative despite showing profit growth in the April-December 2011 period. The company has been investing to drive volumes before the IPO and this could spell trouble down the line if investments have been made without considerations of profitability.