MCX and Financial Technologies


(Shankarnarayan K) #1

Dear Boarders,

This is my first post here . I came across this site just a month back but very impressed with the kind of analysis done here. Companies are analysed threadbare and cannot escape just like that :smiley:

Coming to the point, last week I accompanied a friend to open a demat/trading account and saw that the appication had three exchanges to choose – BSE,NSE and MCX. It occured to me like a flash that MCX can be become an X-bagger(X can range from 2 to 10). Its the only listed exchange, high profit margin and no debt . They are the largest commodity exchage in India with more than 80% market share and Rank #1 in Gold and Silver and Rank #2 in Crude in the world (Not sure who ranked it ). MCX is trading at a P/E close to 20 , but growth companies always trade at high PEs . Crisil never traded with a P/E < 20 .

Financial technologies hold 26% stake in MCX and could be a great asset play. PLease let me known your esteemed views. I am going through MCX AR to figure out more and will post ASAP.

Best Regards,

Shankar.


(Donald Francis) #2

Hi Shankar,

Financial Technologies is good/great to investigate:). There might be tremendous Moat by way of Monopoly/Oligopolies. They have demonstrated time and again - how to attract volumes (at the cost of incumbents too).

They have first mover advantages in many fields. They have replicated the model in other countries successfully. The Exchange Sw should be basically the same - so essentially a replication exercise (with small to major tweaks).

Disc: just first impressions - I mean to have a look. Please take the lead Shankar. Build a case for Positives, Negatives, RISKS

-Donald


(Rajesh Kumar) #3

I see MCX as a great company available at a fair price. Difficult to make out a case based on gross undervaluation. However based on some future projections a case can be made out for buying. These are,

-The company has competitive advantage based on based on 5 forces competitive analysis of Michael Porter. It is in an area where late entrants shall have technological advantage.

)- Uniform platform across financial products.

)- If financial capital of the world moves eastward, as expected, there is a case of investing for long term.

)- Penetration of financial products in Indian population is extremely low, likely to increase volume in future.

)- On valuation side it is trading around 20 times earning. Across the globe exchanges are traded at around 16 times earning. Considering the growth potential in Indian market, premium is justified.

)- MCX appears aggressive; hopefully they shall not start mutually destructive competitive practices.


(Shankarnarayan K) #4

Draft is getting ready on Financial Technologies. Will post tonight or tomorrow morning.


(Subash Nayak) #5

Hi Shankar,

Just playing devil’s advocate here.

)- Is there example in history where exchanges listed in other exchanges have given good return to investors.

)- Any projection on how much trading increase is expected to happen in future (say 1yr, 2yr), and how much margin can be obtained from it. (I feel there would be one time sharp upward movement because of taking market share from NSE, BSE. and then an almost linear growth year after year)

)- I see an ethical dilemma is investing in MCX. In one hand we are propounding the inherent issues with frequently trading, and at the same time investing in companies which will get benefited by such trading.


(Shankarnarayan K) #6

Dear Donald and regular boarders,

Below is the analysis on Financial technologies. I haven't gone very deep into ratios and other numbers . Please post your esteemed views on the company.

The Financial Technologies Group(FTG) have three verticals â Technology ,Exchanges and Ecosystem .


The listed entity Financial Technologies (FT) core business is the technology vertical . The other two verticals are group companies belonging to FTG in which the listed entity FT , has a stake. There are 9 exchanges, a few in India and a few abroad. MCX is the biggest and their flagship exchange in which FT hold 26%, diluted from 31% after the IPO . They also have 5% stake in MCX-SX , which is expected to begin equities trading from Mid November.


FTâs core business is technology. But is looks like they are more keen on the developing the exchange vertical now. The exchanges are formed as separate group companies in which FT holds a stake. In Technology , their flagship product is a broking software called ODIN, which has a market share of 80% and have distributed close to 900,000 licenses so far. All leading brokers have implemented this in the past decade. Currently FT is increasing the capabilities of ODIN to provide new features and increase speed. The product is enabled to handle commodities , derivatives , currency and Bond trading as well and the company is waiting for an boom in these trading segments to realize the full potential of the product. Their other technology products exchange softwares are PowerARMS and DOME , which is installed only in their group exchanges currently. I didnât see the mention of any other exchanges where these softwares are deployed. There are some more products, but of little significance right now.


The exchanges vertical is where the company is concentrating now. MCX is obviously the flagship the company highlights . They started the Bahrain Finance Exchange (BFX) last November, whose iinaugration was attended by the King of Bahrain. Though its in a fledgling stage, its picking speed from the daily turnover numbers and the transaction volumes reported in the AR. They are starting a new exchange in Bostwana, Africa later this year . Exchanges in India like IEX9 (a power exchange) and NSEL(national spot exchange) own a large market share , over 90% in their respective asset classes.


The ecosystem vertical has group companies National Bulk Handling Corporation(NBHC) , atom technologies , TickerPlant and FT Knowledge Management Company (FTKMC).


NBHC is a warehouse where farmers/traders gather and settle their futures position on commodities by physically delivering/receiving the commodities for cash. They have a tie up with Food Corporation of India(FCI). Atom is a service provider of mobile payment solutions. TickerPlant is a financial content provider.


Here is something interesting the company says ::

âThe business model, thus created, is among the rare self-fueling growth model seen today. The technology vertical creates business for the groupâs exchanges, which create business for the ecosystem ventures which, in turn, need the technology solutions provided by the group.â

Financials (FT standalone)

FY10

FY11

FY12

Sales

304

334

413

OtherIncome

344

134

343

TotalIncome

648

468

756

Expenses

195

195

178

EBIDTA

453

273

577

PBT

447

261

529

PAT

344

92

478

FY12 other income consists a component from sale of MCX stake through IPO. This isnât a growth story , but more of asset play/value unlocking, in the current circumstances.

Itâs a net cash company .

Non current-liabilities = 591 crores

Cash on hand = 399 cores

Current investments(mostly mutual finds) = 916 crores

Net cash = 624 crores

A point to note is that the out of the 591 crores non current liability , company took a long term loan of 562 crores partly to retire Zero Cupon Bonds (ZCBs) that were nearing maturity from a Singapore Exchange.

Remaining part of the loan will be used to develop exchanges abroad.

Positives :

1. Itâs a net cash company .

2. Broking software ODIN is their flagship product with no competitors for it till date . As trading in other asset classes get popular , it will generate more business as this product is enabled for other asset classes too. The company says introduction of FCRA bill will boost trading in other asset classes.

3. MCX is an obvious one . No need to elaborate further on that.

4. Company holds stakes in all exchanges belonging to the group. There could be a case for value unlocking like MCX.

Negatives

Company is not concentrating much on R&D on developing new exchange/broking softwares . They are living on just one product ODIN . Company has just 1,100 employees as on date. This shows that they arenât majorly expanding their technologies vertical.


Risks:

1.) Any bad news on MCX will send the stock tumbling 10%. That is for sure.

2.) Stock price was Rs 2,800 in the 2007/08 peak just before the crash . Business has high correlation with stock market conditions .

If competition arrives in the broker/exchange software segment FT can have a very very tough time.


(Ayush Mittal) #7

Though haven’t invested in FT or MCX but I do see a long term moat here. The logic is - Exchanges get created once in decades and hence the valuation of a good exchange can be really rich…we can’t value them from profitability parameters etc.

This co has leadership in severalexchangesand is now trying to replicate the model (which will have lower cost) in new countries. They have been opening exchanges in Africa,Mauritius, Singapore etc.

They have handled the MCX-SX issue verypatientlyand well and now the worst seems to be behind them. If MCX-SX becomes really successful, then this can go a long way.

Ayush


(Donald Francis) #8

Hi Shankar,

Thanks for your detailed work. I hope to do some value addition to this within the week;)

I have no clue of the merits & demerits - this is the first time I will look into it - but I am sure excited by the Edge this “Quality” of a business brings - which should be difficult for others to replicate. And as it gains scale - it seems to be doing that with the success of several of its Exchange inititaives -in several countries - and now in India, too - this should be a solid long term monopolistic MOAT??

From that angle this seems to be a very valuable long term opportunity. It had captured the imagination long back, and then it had spectacularly crashed too (along with the market?). Need to understand more of this business and the uniqueness of it, to be able to add value.

Will do so within this week. Block half a day, if needed;)

Thanks Shankar again, for your initiative.

Rgds

Donald


(Rudra Chowdhury) #9

My take on MCX

keeping in mind the inherent dislike to long posts, I feel this is better.

Although there is no doubt this is a great business, however the stupendous growth from the recent past seems unlikely to continue and company will grow at moderate 12-15% over next couple of years.

The recent run up seems to be because of cash generation possibility from MCX-SX stake sale. I have highlighted the major risks and concerns too.

Disc: No positions currently, invested in the IPO and subsequent downtrend and booked profits later.


(T Anil Kumar) #10

Thanks Rudra and Shankar for detailed and good work.

I did some work on FT 2-3 years back as part of the initiation for the Captive KPO in which I was working. Cannot recall fully but these are some of the points which I remember:

  1. Their standalone results are of no use and often confuses more, as theyrealizelot of income from their subsidiary. If you see their consolidated accounts, net profits are much less than standalone. Eg. Standalone NP for FY is 261 crs and consolidated is 160 crs.

  2. The various subsidiaries which they have started are more like venture startups, where there will be more failure, and few success. But that few success are capable of getting lot of upside. Eg is MCX

  3. I agree with Ayush that FT cannot be valued on financialparameters. One needs to take a call on their various ventures.

  4. Ideal case will be to value their establish business and buy when rest of the business comes free or at nominal valuation. But this may happen only in a severe crash. Another way is to do a detailed analysis of their various ventures, which is a very very time consuming process looking at their presence in various geographies and in different fields.

Disc: Hold no position currently.


(narendra ) #11

recently the company for whom I work developed a bridge to start trading with dgcx(dubai stock exchange).Later came to know that this is promoted by financial technologies.Had a look at it, can not consider FT as a typical IT company. They have developed exchanges and they keep on providing technology to these exchanges.Having ownership in these companies advantageous to FT.Healthy balance sheet , investments in mcx and othersubsidiaries will help on the downside.Just made a token entry in to this, will increase the holding afteranalyzingthescalability scope.But previous crashes scares me to bet big.


(narendra ) #12

Can any body thow some light about the warrants hold by FT and MCX in MCX-SX.

As per the share holding pattern athttp://www.mcx-sx.com/Downloads/mcx-sx_cl35.pdf

FT and MCX together hold 68.72 of warrants in MCX-SX. MCX-SX may go for an IPO , if FT can convert the warrants in IPO then this looks attractive .

FT stake in MCX valued at around 1800 crores.


(narendra ) #13

as per annual report , this is their stand alone results for 2012((Excluding capital gains, diminution in long term investment and exceptional items)

Np of267 Crores against income of 544 crores (Since this is more of a software product company , margins are more once product is released).This has been grown around around 45% CAGR since 5 years .

I do not know how many multiples a financial product company trades in India markets ( as we have very less product companies , I - flex used to be one ).A peer called Fidessa ( similar products as FT)in UK trades at 18 PE.

SO valuing this at 18 PE = 267*18 = 4806

sow we have around 1800 crores stake in MCX + Stand alone business 4806 (+ or - 50% as we donot have enough visibility here.I think this should be valued less here)+ MCX-SX stake ( if gets monitised post/pre IPO)+ holding in foreign exchanges ( should be of very less value as still they are in nascent stage)

SO if we could some how approximate these things we can arrive at a fair value for FT.


(narendra ) #14

donot know how to edit the message .Profit CAGR for last 5 years is 21.95 %(not 45%)


(narendra ) #15

Following are the associate companies where FT has stakes as of March 2012

1.Multi Commodity Exchange of India Limited (MCX) — 26% -

2.Indian Energy Exchange Limited (IEX) )— 33.49%

3.MCX-SX Clearing Corporation Limited (MCX-SX CCL) — 23%

4.SME Exchange of India Limited (SME) — 49%

5.Dubai Gold and Commodities Exchange DMCC (DGCX) — 39.10%

(including its subsidiary viz. Dubai Commodities

Clearing Corporation DMCC)

These are Loss makingsubsidiaries:

atom technologies ######### -13crore

Singapore mercantile PTE limited ###### - 84 crores

SIngapore mercantile exchange clearing corp ltd ## - 20 Cr

FT group investments pvt ## -24 cr

FT middle east DMCC ## -1.8 cr

Global Board of Trade Limited(GBOT) ## -66cr

Bahrain Financial Exchange BSC ©* ## -52cr

Boursa Africa Limited ## -8cr

These are Profit makingsubsidiaries:

National Spot Exchange Limited ## 25

Indian Bullion Market AssociationLimited## 3

National Bulk Handling CorporationLimited ##3

Note : Haven’tincludedthe subcidiaries which contributes ± 2 cr here

MCX-SX Potential:

NSE net profit for previous year is 17301 Cr.Even 10 % of that could do wonders for any new exchange.NSE is only biggest exchange in India with around 90% share .These is always space for second big player for a nation of India scale.


(narendra ) #16

Correction NSE profits are 704 Cr as per http://www.nseindia.com/global/content/about_us/NSEIL_MAR_2012.pdf


(narendra ) #17

FT has 33% stake in MCX-SX (including warrants).As per Mitilal oswal report MCX-SX is valued at 1400 Cr( seems reasonalbe) , so thisturns out to be 462 Cr.


(narendra ) #18

Stand alone results .

Particulars Quarter Ended
Dec. 2012 Dec. 2011 % Var.
Sales 103.94 108.88 -5
OPM % 60.83 60.42 1
PBDT 111.18 109.67 1
PBT 105.42 105.24 0
NP 89.45 86.87 3


MCX-SX to start trading from Feb 11. Lets see how it goes


(Amey Desai) #19

is the fall in MCX a reason to buy - or there are some signals which we should take cognizance of ?


(narendra ) #20

Today I saw a report on Financial technologies by Motilal ( yet to read completely).

Helps to understand the company

http://www.motilaloswal.com/site/rreports/HTML/634957392444148299/index.htm