MCX: 800 pound Gorilla of Commodities Trading.

Invest
Report Date: Offering: Opinion:

21st Feb 12 Price Range Rs 860 to Rs 1032/-, available from Feb 22-24 Very attractive offering, is likely to be oversubscribed, apply at upper end of range

Multi Commodity Exchange of India MCX Description and Profile

The MCX is an electronic commodity futures exchange, currently the largest Commodities Trading (CT) platform in India, with an 82% market share. MCX offers more than 40 commodities across segments such as bullion, ferrous /non-ferrous metals, energy, and a number of agri-commodities, for CT on its platform. The Exchange is the worlds largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures MCX has more than 2,100 registered members operating through over 247,000 terminals across India. MCX is also the fifth largest CT exchange globally. Other Indian exchanges are National Commodities & Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX) and ACE Derivatives & Commodities Exchange. Financial Technologies - FT is a software/ exchanges/ ecosystem company promoted by Jignesh Shah. It is a listed entity (Financial Technologies). Market Cap is 4200 crores. FT has started, promoted and spun off MCX, and is the largest shareholder. It also supports, maintains and develops the current software based platforms. This snapshot of FT will give us some indications about MCX.

Promoter - Financial Technologies Snapshot

Figure 1 Price 5 year view of MCX The FT stock has been very volatile, rising to over 3000 compared to todays 910, due to the excessive excitement around MCX, as well as the general market euphoria in FY 2007. FT stock also fell in Dec 2011 to a low of 518, before recovering. Revenues have been inconsistent also. But current price reflects a P/E of 53 times.

Report by JainMatrix Investments Ltd.

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Multi Commodity Exchange of India: Invest

Revenues, EBITDA, PAT in Crores 700 600 500

February 22, 2012

EPS Revenues EBITDA PAT EPS 80.0 70.0 60.0 90.0

FT Financials

400 300 200 100 0 FY09 FY10 FY11 FY12 E

50.0 40.0 30.0 20.0 10.0 0.0

Figure 2 Financials snapshot of FT The PE is high because FT has been a very innovative company, to have created the MCX platform, and taken leadership position in a very knowledge intensive, and high potential industry of CT. FT has also taken its capabilities to new markets, to set up a network of 10 exchanges and 5 ecosystem ventures, connecting growing economies of Africa, Middle-East, India and SouthEastAsia.

MCX - Financials
Revenues, EBITDA, PAT in Crores 700 Revenues 600 500 400 30.0 300 200 100 0 FY09 FY10 FY11 FY12 E 20.0 10.0 0.0 EBITDA PAT EPS 40.0 50.0

MCX Financials Figure 2 Financials of MCX

EPS 60.0

Figure 3 Financials snapshot of MCX

A quick view of figures 2 & 3 reveals a transfer of business from Promoter FT to spin-off MCX. This is positive for the new entity. MCX is also cash rich from current operations. The MCX IPO is of 64.27 lakh equity shares (dilution of 12.6% post issue) for subscription during February 22-24, 2012. The exchange could raise Rs 663 crore at the upper end of the price band. IPO shares sale is by shareholders like FT (promoter), State Bank of India, GLG Financials Fund, Alexandra Mauritius, Corporation Bank, ICICI Lombard Gen. Insurance Co and Bank of Baroda. There is no fresh issue of equity, so MCX will not get any money through this IPO. Rating agency CRISIL assigned a grade 5/5 to the IPO, indicating strong fundamentals.

IPO Offering Outline:

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Multi Commodity Exchange of India: Invest

February 22, 2012

By current projections, IPO pricing PE ratio is 15 to 18 times of FY12 earnings.

Why does MCX need to do an IPO? FT, the promoter, holds 31% in MCX, and has to dilute its stake to 26% in MCX to conform to guidelines prescribed by the CT regulator, Forward Markets Commission. FMC is part of Ministry of Consumer Affairs, Govt. of India. Other shareholders mentioned above are early investors looking for an exit route. Was there any legal issue/ court case around MCX or Financial Technologies? FT has faced a series of litigations from SEBI, FMC, etc on aspects like corporate structure, Promoter holding and Trading permits. However these are mostly resolved. They were also necessary as a Commodities Trading platform in India is a critical infrastructure that can affect (and of course improve ) lives of crores of farmers/ agro based workers, commodity consumers, etc. Other litigations pertain to transaction level issues, which are inevitable as trading and discipline are introduced into new sectors, new commodities and new producers and consumers. Investors should look at the MCX IPO because: This is among the largest IPO offers in the last year. There has been an improvement in investment climate & sentiment in India from Dec11. The IPO is testing this new investment climate. It is believed that Retail as well as Institutional investors are waiting in the sidelines for good investment and entry opportunities. MCX is a pioneer in a new industry, provides a critical infrastructure and is a good independent business opportunity. It has an innovative, fast growing platform that not just dominates India but also is in global top 3 in several commodity categories. MCX has good management with global ambitions; firm is cash positive, profitable and growing fast. As a standalone entity it is attractive.

Risks:

FT should stay at arms length away from MCX and allow this firm to develop independently. Government controlled sector. There are periodic bans on commodity exports. The Indian Govt should allow CT exchanges and market to grow. Competition can intensify as some other firms have the backing of government, NSE, BSE, PSUs, etc. My opinion is that Commodities trading should be restricted to Producers, Consumers, Institutions and professional / specialist investors. Retail investors without specialized knowledge may burn their fingers, and give the CT business bad publicity. MCX is part of a new agri /commodities revolution in India, where trading can disintermediate the commodities supply chain, reduce price inflation, enable better price realization for producers and reduce costs (and risks) in the system. That is if markets develop as expected . The reason these discounts are available to investors is because MCX is testing troubled waters; market sentiments have been poor in the past and some IPOs have even been cancelled recently. Also public resentment is high as IPOs from 2010/11 are running at discounts to IPO pricing. This is a very attractive investment opportunity. I expect this IPO to be a big success and get heavily oversubscribed. Also there should be a good appreciation of the share on listing. Conservative investors should watch subscription on 22-23 Feb and take a decision by 24th.

Opinion, Outlook and Recommendation

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