MCX IPO ends 50 times covered, prices at the top

Shareholders of Multi Commodity Exchange of India (MCX), the country’s trading platform for commodity futures, have raised Rs6.63 billion ($134 million) from India’s first initial public offering in seven months after the price was fixed at the top end of the range. The latter was no surprise after investors piled into the transaction, leaving the overall deal just over 54 times covered.

However, the demand does stand out compared with most other IPOs in Asia so far this year, which have seen muted interest both from institutions and retail investors. The enthusiasm reflects a renewed appetite for Indian stocks in general this year, but MCX also stands out because of its leading market position for the trading of commodities futures. In fact, with an 87% market share during the nine months to December the online exchange is close to being a monopoly player, something that is rare to find through an IPO these days. It is also one of the top five commodity futures exchanges in the world, based on the number of contracts traded, with particularly strong market positions in silver, gold, copper and natural gas.

The average daily turnover, which is a key earnings driver for any exchange, has increased to Rs514.2 billion during the nine months to December 2011 from Rs320.6 billion in the fiscal year to March 2011 and Rs149 billion in the fiscal year to March 2009.

The way things were going became clear the day before the books opened to the wider investment community when the company sold 15% of the net offering to institutions willing to come in as anchor investors. The anchors have to commit not to sell the shares for the first 30 days, but in return they are typically able to get a larger portion of the deal since, unlike the rest of the IPO, the anchor tranche isn’t allocated proportionally. One-third of the shares has to go to Indian mutual funds, but other than that the bookrunners and the issuer have the discretion on how to place the shares.

MCX’s anchor tranche attracted orders for about 20 times the number of shares available and all the orders came in without a price limit. As a result, the price on this portion of the deal was fixed at the top of the range at Rs1,032 per share, sending a strong message to other investors that they would have to pay up if they wanted a piece of the action.

According to a statement last week, the anchor tranche was split between 12 investors, including Wellington Management, Blackrock, ICICI Prudential, Birla Sun Life, Kuwait Investment Authority, Sundaram Mutual Fund and Credit Suisse, which each received slightly more than 10% of the shares set aside for this portion of the deal. The rest was divvied up among the other five. Given the oversubscription, many investors who had hoped to take part as anchor investors received no shares at all.

The main offering was open for subscriptions from Wednesday to Friday last week.

The deal comprised 12.6% of the outstanding share capital, which translated into a total offering size of approximately 6.43 million shares. Of that, 250,000 shares were set aside for employees, resulting in a net offering to public investors of 6.18 million shares. All the shares were secondary and put up for sale by a number of existing shareholders, including State Bank of India, GLG Financials Fund, Alexandra Mauritius, ICICI Lombard General Insurance and Bank of Baroda. The promoter, Financial Technologies, also reduced its stake to 26% from 31.2% to comply with Indian regulations that require original promoters of nationwide commodities exchanges to reduce their stake to a maximum of 26% after the first five years of operation.

The shares were marketed at a price between Rs860 and Rs1,032 apiece, which based on the bookrunners’ estimates equalled a price to earnings multiple of 11 to 13.2 times for the 2012 calendar year. MCX has a financial year ending in March, so the numbers have been adjusted to make it more comparable with other exchanges.

Even at the final valuation of 13.2 times, it comes at a significant discount to major Asian stock exchanges like Hong Kong and Singapore, which trade at about 29 times and 24 times respectively. The Chicago Mercantile Exchange, which is one of the world’s top commodities exchanges, is valued at about 16 times this year’s earnings.

“We believe market-leader position, medium-term superior return ratios, scalable business model and strong business growth outlook deserve a premium valuation” compared to exchanges in developed markets that trade at an average of 16 to 18 times forward earnings, analysts at Indian brokerage KRChoksey argued in a pre-IPO report. “Hence we recommend [investors] to subscribe to the issue with a medium-term investment objective. We also expect 15% listing gains on the issue from the upper end of the price band.”

Several other Indian brokerages also recommended their clients to subscribe, which likely contributed to the strong interest from all types of investors. The 35% of the net offering that was set aside for qualified institutional bidders (QIBs) was 49 times covered with 41% of the demand coming from foreign investors. The 35% retail tranche ended 24 times covered and the 15% portion targeted at non-institutional investors, including high-net-worth individuals and companies, drew demand for 150 times the number of shares available. Again, almost all of the orders came either at the top end of the price range or at strike.

While MCX is somewhat unique in terms of its type of business, the level of interest does send a strong signal to other issuers that appetite for Indian equities is definitely back. A number of block trades during the past month have shown the same thing, including Citi’s sale of its remaining stake in Housing Development Finance Corp (HDFC) at the end of last week, which raised $1.9 billion and attracted more than $4 billion of demand.

This has supposedly encouraged the government to finally go ahead with its sale of a 5% stake in Oil and Natural Gas Corp (ONGC), which was postponed several times last year due to a lack of interest. A source said at the end of last week that the deal could come as early as this week, although yesterday local media reported that a government meeting related to the sale that was scheduled for yesterday had to be postponed because one of the key ministers was traveling.

However, there are also signs that the Indian stock market is in the need of a breather after gaining 21.4% in the two months to February 21. Since then the benchmark Sensex index has fallen for four straight sessions, including a 2.8% drop yesterday. This has eroded the year-to-date gains to 12.7% and allowed Hong Kong and Tokyo to overtake in the 2012 performance ranking. As of yesterday’s close, Hong Kong’s Hang Seng Index was up 15.1%, while Tokyo’s Nikkei 225 had gained 13.9%.

In a research report issued mid-last week, UBS strategists Niall MacLeod and Aakash Rawat said that India looked vulnerable to profit-taking after its recent outperformance, but argued that the underlying fundamental story is intact. In the absence of an oil shock, inflation will fall, allowing the central bank to ease monetary policy.

Also, “this market is not expensive relative to its regional peers. We would buy into any weakness,” they said.

Citi, Edelweiss and Morgan Stanley were joint lead managers for the MCX IPO. The stock is expected to start trading on March 9.