MCX to launch India's first IPO in 2012 next week

Multi Commodity Exchange of India (MCX) yesterday said it aims to raise between Rs5.53 billion and Rs6.63 billion ($111 million to $134 million) from India’s first initial public offering this year. All the shares are secondary, however, which means none of the money will go to the exchange. Instead, the key purpose of the IPO is to provide an exit opportunity for some of the long-term shareholders and to enable the promoter to reduce its stake to comply with Indian regulations.

The deal, which has been talked about for years, will be open for subscriptions from Wednesday to Friday next week (February 22-24). An anchor tranche, comprising 15% of the net offering and targeting institutional investors, will be completed the day before the books open to the broader investor community.

The price will range from Rs860 to Rs1,032 per share and the deal will account for 12.6% of the outstanding share capital. This will translate into a total offering size of approximately 6.43 million shares. Of that, 250,000 shares will be reserved for employees, resulting in a net offering to public investors of 6.18 million shares.

The timing of the transaction looks spot on as it coincides with a rally in Indian share prices. Having underperformed most of the rest of Asia last year, India is currently home to the best-performing stock markets in the region with Bombay’s Sensex index up 17.4% and the National Stock Exchange’s Nifty index up 19.4%. The gains are underpinned by a belief that the Indian central bank, after cutting the cash reserve ratio for banks for the first time since 2009, is at the beginning of an easing cycle that will help to counter the widespread expectations of a slowdown in global economic growth this year. And investors seem only too happy to bottom-fish for Indian equities right now.

But more importantly, MCX is benefiting from the continuing demand for commodities. Set up in 2003, it is the leading exchange in India for the trading of commodity futures with an 87% market share in the nine months to December. The electronic exchange currently offers 49 different futures contracts across a variety of commodity products, including gold, silver, copper, crude oil, agriculture products and carbon credits and ranked as the fifth largest commodity futures exchange globally in the six months to June last year based on the number of contracts traded, according to a survey by the Futures Industry Association. By that measure, it was also the world’s largest silver exchange, the second largest gold, copper and natural gas exchange and the third largest crude oil exchange in that same period.

MCX focuses on futures contracts, but since December 2009 it has offered an exchange of futures for physicals (EFP) facility. According to its red herring prospectus, it was also the first exchange in India to initiate evening sessions to synchronise with the trading hours of global exchanges in London, New York and other major international markets.

Looking at the numbers, the average daily turnover 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. Like most other exchanges, MCX derives a large part of its revenues from transaction fees, which means trading volumes are highly important for its bottom line.

However, the improvement in net profit has been significantly slower than the pick-up in turnover. Indeed, in fiscal 2011 the net profit fell 20% to Rs1.76 billion from Rs2.21 billion the previous year. During the first nine months of the current fiscal year (which ends March 31) net profit amounted to Rs2.18 billion.

The offering doesn’t come cheap, however. The price range implies an historical price-to-earnings (P/E) multiple of 24.9 to 29.9, based on earnings per share of Rs34.56 in the fiscal year to March 2011. Global exchanges trade at an average 17 to 18 times historical earnings, although Asian exchanges, because of their stronger growth, tend to trade at P/E multiples of around 25 times, Morgan Stanley’s India chairman VK Bansal told reporters at an MCX press briefing in India yesterday. Hong Kong Exchanges and Clearing, which operates the Hong Kong stock and futures exchanges, trades at an historical P/E of about 29.

Morgan Stanley is a bookrunning lead manager for the IPO together with Citi and Edelweiss.

MCX is the first Indian exchange to go public and also the first Indian IPO of size since L&T Finance Holdings raised $277 million ahead of a listing in late July. As such, it will be an important test for the market and according to a source, there is strong interest among both domestic and international investors already.

“India is on fire right now, so anything you do is bound to attract a lot of attention,” the source said, referring to the sharp gains in the equity market. Since mid-January, the Sensex index has fallen on only five days. And since the latest low-point on December 20, it has gained almost 20%.

Add to that the fact that investors have been starved of opportunities in the primary markets. During the whole of 2011, India saw only $1.4 billion worth of IPOs, which was down from $8.3 billion the previous year and accounted for just 1.5% of the total IPO funds raised in Asia-Pacific last year, Dealogic data show. Large deals in the pipeline, including government sell-downs in Oil and Natural Gas Corp (ONGC) and Steel Authority of India (Sail), kept getting postponed as the Indian stock market lost 25% during the year.

A successful deal by MCX could open the door for some of those transactions to get out the door before the end of the current Indian fiscal year in March. The ONGC transaction is expected to raise about $2.5 billion, while Sail is targeting about $1.4 billion, according to earlier statements.

In addition to the 15% anchor tranche, another 35% of the net offering will be offered to qualified institutional bidders (QIB), while 35% will be set aside for retail investors and 15% for non-institutional investors, including high-net-worth individuals and companies. There is no overallotment option.

The sellers include State Bank of India, GLG Financials Fund, Alexandra Mauritius, ICICI Lombard General Insurance and Bank of Baroda. The promoter, Financial Technologies, will reduce its stake to about 26% from 31.2%. According to Indian regulations, 26% is the maximum stake allowed for the original promoters after the first five years of operations as a nationwide commodities exchange.

Major shareholders who are not selling include Fidelity, Euronext, Merrill Lynch and the National Stock Exchange of India.

The final price will be determined on February 25 and MCX is scheduled to start trading around March 9.