MCX IPO: Book Profits While The Going Is Good

After a disappointing CY2011 in the course of which many companies either pulled out their IPOs due to poor market conditions or were involved in price-rigging scams, the Multi-Commodity Exchange of India (MCX) IPO, which debuted on February 22, 2012, was widely piped up to revive the dying primary market.

Keeping up to the expectation built around it, the MCX IPO offer received an overwhelming response from investors as it achieved a stellar oversubscription of 54x and settled for an upper price band of Rs 1,032 a share.

At the time of writing our new issue analysis, we had recommended readers to subscribe to the issue with a view to earn healthy listing day gains. As expected, the counter got listed on the BSE at Rs 1,387 per share, a premium of 34 per cent over its issue price. While there is no arguing the fundamental prowess of MCX’s business model and its premier operational ability, we advise our readers to book profits at the current levels.

Our bearish attitude on the counter stems from its valuations. At a PE of 22.17x of its annualised EPS of Rs 57.77, we believe that the counter is very expensive in comparison to its NASDAQ-listed peer Chicago Mercantile Exchange (CME Group), a much more matured player available at a PE of 15.54x.

Moreover, we feel that caution is necessary over the recent robust financial as well as operational performance that the company has delivered over the past year, which has been chiefly on account of the high trading activity in gold and silver commodity futures. With 90 per cent of its turnover generated through the metals and energy commodities, the revenue stream also seems concentrated.

Finally, with the Union Budget 2012-13 around the corner, the government’s divergent views on the implementation of commodity transaction tax (CTT) will also be a major overhang on the counter in the near term. With its back against the wall and very little options to explore, the government, which is under severe pressure to spur up its revenue receipts, may introduce the CTT in the upcoming budget scheduled for March 16.

However, the Ministry of Commerce is opposing this move stating that it would distort the nascent commodity market and lead to ‘dabba’ (bogus) trading. Whatsoever the outcome may be, the passage of the CTT will seriously impact the volume from arbitrageurs and could possibly reduce the liquidity and consequently the exchange’s profitability.

Also, at present there seems to be no clarity on the proposed amendments to The Forward Contracts (Regulation) Act (FCRA), which aims to not only allow options to be traded on the Indian commodity bourses but also permit FIIs and mutual funds to take part in commodity trading. Until and unless such an act sees the light of the day, we don’t see any new alphas being created for the investors.

In conclusion, looking at the above mentioned woes, we advise readers to book profits in the counter at its current levels and re-enter at cheaper levels of around Rs 1,050-1,120 a share.