MCX's 15% stake sale to Kotak @ 'sale' price; likely to get challenged

By Geetanjali Kedia

This mornings’ headline flashed in bold: Kotak Mahindra Bank to buy 15% in Multi Commodity Exchange of India Limited (MCX) from its promoter Financial Technologies (India) Limited (FTIL) for Rs. 459 crore i.e. 76,49,755 equity shares of Rs. 10 each at Rs. 600 per share.

This is against Friday closing price of Rs.786 on BSE of MCX, giving a steep discount of 24%, which is seen arbitrary, under-valued, biased and prejudicial to the interests of the shareholders of FTIL.

Can such a huge discount be justified? We have tried to dig deep into the fundamentals of MCX:

1. MCX is a debt-free company having consolidated net worth of Rs. 1,146 crore, as of 31^st March 2014, with cash and equivalents of Rs. 1,426 crores. Its entire net worth is available in cash and bank balances and other liquid instruments. To re-phrase it, MCX has book value per share of Rs. 225 and cash and equivalents of Rs. 280 per share. Indeed a ‘rare’ asset.

2. MCX reported revenue of Rs. 341 crore for FY14, with total income being placed at Rs.440 crore, with PAT standing at Rs. 153 crore, for FY14, resulting in an EPS of Rs. 30.22. This discounts the transaction price of Rs. 600 per share, by a PE multiple of less than 20 times.

3. MCX had debuted on Indian bourses with an IPO in February 2012, when the offer for sale was priced at Rs. 1,032 per share, resulting into a PE multiple of 30 times, as its FY 11 EPS was Rs.34.56. Hence after 3 years, why its PE multiple fell, despite the fact that PE multiples are always lower in the primary market, as against a deal happening of a large block to a single investor?

4. FY14 EBITDA of MCX stood at Rs. 245 crore. The deal gives a net enterprise value (EV) of Rs. 1,910 crore to MCX, net off cash. Thus, EV/EBITDA multiple is just 7.8 times only. On cash profit of Rs. 187 crore, cash EPS is Rs. 36.7, which discounts the EV by 10.20 times only.

5. After exit of FTIL as promoter of MCX and on compliance of FMC order, MCX may be allowed trading of derivative instruments like commodity options and index futures, due to which, volumes are likely to rise manifold, as was witnessed in equity exchanges (BSE and NSE).

6. In May this year, Renuka Sugar sold 7.50% stake in National Commodity and Derivatives Exchange (NCDEX) for Rs. 66.54 crore, valuing India’s second largest commodity futures exchange at Rs. 888 crore, having market share of close to 15% in commodity futures trading in India, which recently rose from 5%, post the Rs. 5,600 crore NSEL (National Spot Exchange Limited) scam.

7. MCX is a strong world class technologically-advanced institution, being one of the top 3 exchanges globally. Post exit of FTIL and with quality investors like Kotak and other investor for remaining 5% stake likely to come in, it would not be difficult for MCX to regain its lost market share, thus paving way for better financial working of MCX ahead.

There are a couple of apprehensions currently, before the investors of MCX. But these will also pass eventually:

1. Income Tax authorities have re-opened the assessments of MCX, of last six years, to ascertain its income afresh. Similar moves were initiated during the Satyam scam, but acquirer Tech Mahindra got a clean hold over the company.
2. Secondly, concern on related party transactions surface. However, since FTIL will only be a technology partner, this should not be a pain-point in the future.
3. Kotak Mahindra Bank, in all likelihood, will get a board seat on MCX in future, being the single largest shareholder, inspite of the fact that the proposed investment by Kotak in MCX is now termed as a financial investment and not a strategic one.

Commodity market regulator Forward Markets Commission (FMC) had directed FTIL to reduce its 26% stake in MCX to not more than 2%, on the ground having been declared ‘not fit and proper’. FTIL had contested this reduction, but now is in the process of exiting completely from MCX. Why this change of heart?

On 6^th May 2014, FMC had issued guidelines about shareholding norms in national commodity exchanges, under which, no resident individual can hold more than 5% stake and only a commodity or stock exchange, depository, bank, insurance company or public financial institution can hold up to 15% in such an exchange. Hence, Kotak could not acquire 24% stake, as intended by them, which was earlier on the block, as per then prevailing regulations.

Currently, no investor holds over 5% in MCX. When a large chunk of shares change hands in a sought-after asset, pure demand-supply economics warrant a higher price, vis-a-vis the price trading on the stock exchange. There were 9 bidders shortlisted by FTIL for 24% stake. Even post FMC’s May regulation, BSE, Tata Capital, Reliance Capital, besides Kotak, were the eligible bidders. Hence, there was no lack of interest from other suitors. Rs 600 per share and enterprise value of Rs. 1,910 crore for India’s largest commodity exchange, is indeed a dirt-cheap or a ‘sale’ price. Ace investor Rakesh Jhunjhunwala, recently acquired 2% stake in MCX at Rs.666 per share, from FTIL, and is now holding close to 3.50% in MCX, which also indicates the potential value of MCX. 

Therefore it is clear that no transparent process is followed for price of Rs.600 per share. FTIL can't strip of its valuable assets at an inadequate price, more especially, when it is under investigations, scrutiny and close guard of various authorities like EoW, Investor Forums, Courts, to protect the interests of the investors of Rs. 5,600 crore, having invested in NSEL, a 99.60% subsidiary of FTIL, which is alleged to have siphoned off the entire money, where recovery process has been initiated by the authorities. FTIL would have been able to transfer its stake in MCX at Rs.600 per share, in the normal circumstances, if no investigations would have been initiated against its officials and subsidiary NSEIL.

The pricing of the current deal at Rs. 600 per share is seen to be way below its fair value, having arrived at in an unfair, non transparent manner which is prejudicial to the interests of the shareholders of FTIL, without having followed due commercial process, to arrive at the judicious and correct value per share of MCX, in a true and fair manner. Hence, most likely, the said valuation is likely to get challenged, may be by the authorities or by investors’ forum, which will be in the larger interests of the shareholders of FTIL as well as stakeholders in NSEIL.