With MCX-SX now receiving the long-awaited approval from the Securities and Exchange Board of India (Sebi) to trade in other asset classes, including equities, value unlocking could happen for its promoters like MCX and Financial Technologies (FT). According the Sebi release, MCX and FT will have to bring down their stake together in the MCX-SX to five per cent. MCX and FT currently holds 4.99 per cent each in MCX-SX and another 32 per cent and 33 per cent, respectively in the form of warrants. With the Sebi’s approval, the Street will also start according value to this holding, which was not ascribed earlier, reckon analysts. For instance, in its April report Citi Investment Research said they do not assume any value for MCX-SX but potential unlocking from strategic sales could happen.
As analysts start putting a certain value to the investments that MCX and FT hold in MCX-SX, the price targets for their stocks are also likely to shift upwards. In terms of the quantum of unlocking and valuations, if it is assumed that MCX-SX gets the same value as it was valued during the placement of equity in fiscal year 2009-10 at about Rs 3,300-3,900 crore, the value of 37 per cent stake in MCX works out to around Rs 1,400 crore (almost 25 per cent of its current market capitalisation).
FT holds an estimated 33 per cent stake in MCX-SX, which could fetch it around Rs 1,270 crore (35.5 per cent of its current market cap). According to the announcement, their equity stake in MCX-SX can be brought down over the next 18 months whereas the equity rights or interest through warrants could be reduced over three years.
In a typical case, analysts do not take the investments in subsidiaries at the current value. But, they usually apply a discount of 20-30 per cent, which they term as holding companies’ discount. However, that is for the conservative purpose due to the long-term nature of the holding of the investments. But, in case of MCX and FT, the holding companies’ discount is unlikely to apply as the investments in MCX-SX are bound to be sold as prescribed by regulations. This means valuations will reflect on the higher side in these cases.
With this development, FT will benefit by a larger extent because it also holds 26 per cent stake in MCX, which should reflect in its valuations.
Needs to scale up
Meanwhile, MCX-SX, which is primarily in currency trading, continues to see improvement in the business with average daily turnover crossing Rs 12,927.83 crore in June 2012, compared to just Rs 355 crore during its first month of operations.
It has nationwide presence, covering about 707 towns and cities in India, with the support of 750 trading members. It can leverage its presence in the currency segment and the existing base to enter into the other segments, such as equity and equity F&O (derivatives), interest rate futures and wholesale debt segments for which it has received approval from Sebi. However, the scale-up in the respective segments could take some time, especially in the equity segment, given that it would have competition from the existing established players like the Bombay Stock Exchange and National Stock Exchange. Hence, its progress on these fronts and ultimately its contribution to financials will determine how much value it can add for its shareholders, going forward.