MCX: Worth The Hype?

After losing steam during the IPO stage, MCX is trading lower than its listed price. Is this stock worth picking up at the current prices?

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 was widely piped to revive the dying primary market.

Keeping up to the expectations built around it, the MCX IPO offer received an overwhelming response from investors, achieving a stellar oversubscription of 54x. It was finally listed at Rs1387 a share, at a whopping 35 per cent premium to

Rightly so, the value of gold and silver futures contracts, which contribute more than 50 per cent to the total value of all futures contracts traded on the MCX bourses, have registered a decline in the January-March 2012 quarter after reporting rapid growth in the first nine months of FY12. The value of gold futures contracts have fallen from Rs 11052 billion in the December 2011 quarter to Rs 9292 billion in the March 2012 quarter, down by 16 per cent. The same for silver stands at Rs 11646 crore in January-March 2012 as against Rs 11915 crore in October-December 2011, down by more than two per cent. The number of traded contracts for gold and silver on the exchange platform has also taken a beating on a sequential basis, indicating that investor participation on the bourses of MCX has declined.

In fact, the data collected for all commodities traded on the MCX platform shows that the values as well as volumes for all futures contracts have fallen on a sequential basis. While this could be a reason for the recent decline in its share price on the stock exchanges, the fall also gives an inkling that one may expect a below par performance from the MCX on the financial front when it announces its March 2012 quarter earnings.

Going forward, we believe that the June 2012 quarter earnings would also be far worse than expected. Data compiled from the MCX website shows that the value of silver futures contracts on the bourses has taken a solid beating between April-May 2012 as against April-May 2011, which has resulted in an overall decline in the value of all utures contracts traded on the MCX bourses.

Hence, keeping all these factors in mind as well as other concerns raised in our earlier write-ups pertaining to its novel business model, the concentrated revenue stream derived from a handful of commodities and the steep valuations as compared to a globally listed matured player like Chicago Mercantile Exchange (CME Group), we advise readers and the investor community at large to stay away from the MCX India counter, as we expect it to underperform on the bourses.

In fact, we at DSIJ, were one of the few who had taken a contrarian call on the MCX India IPO at a time when most brokerage houses and markets experts had hailed the offer, touting it as a massive wealth creator. We believed that despite its listing day gains, MCX would eventually tank, and hence, in the best interest of our readers and the investor community, we had recommended booking profits on the listing day.

At the current levels of Rs 982.20 a share, the MCX counter continues to remain expensive at 17x its FY12E annualised EPS of Rs 57.77 as compared to CME, which is trading at 15.72x its Bloomberg estimated annualised EPS of USD 16.53. We continue to expect that the counter would underperform on the stock exchange, and urge investors to book losses and stay away from it.