Business Standard

Short-term pain for MCX

Due to imposition of CTT and likely stake sale by big investors, the stock is likely to remain under pressure for at least a while

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MCX’s share price, down almost 40 per cent since November (including 12.4 per cent after the Union budget) to Rs 979 currently, could remain under pressure for some more time.

The imposition of a commodities transaction tax (CTT) in the Budget, subdued initial response to the recently launched equity exchange, MCX-SX, and now the news of stake sale by institutional are key overhangs. Some of these issues also have a bearing on the financials of MCX, which is why analysts have downgraded their earnings estimate of the company.

However, analysts also believe some of the issues are short-term and partly factored in the share price. Their advise to investors is to be patient and use further correction in the share price as an opportunity to buy the stock. That’s because the longer-term story of remains intact and the commodity segment is still evolving.

The recent correction in the stock is partly led by the sale of shares by institutional investors and the generally poor sentiment for mid- cap companies. On the seventh of this month, the one-year lock-in period expired for institutional investors which had bought shares before the initial public offering (IPO). Now, since they are free to sell the stake, it has led to an increase in supply at the MCX counter. “Many banks bought shares at Rs 10 pre-IPO. They might not hesitate to sell even at the current price, especially when some of the banks wanted to book profits before the year end,” says an analyst with a leading broking house.

Recently, Merrill Lynch Holdings sold about a million shares of MCX at Rs 1,020 apiece, while global exchange operator NYSE Euronext had to cancel its plan to sell 4.8 per cent stake, as it did not find enough buyers even at a discount to the ruling share price. Analysts believe a lot of supply might still be waiting, so further pressure on the share price cannot be ruled out. This selling pressure has come at a time when the market is worried about CTT, earnings downgrades and pressure on commodity trade volumes.

Volume worries
Commodity volumes had already been falling for six months. Gold and silver account for almost half of the traded volumes of MCX. However, as gold has become dearer due to weakening of the rupee and imposition of import duty, this led to relatively lower volumes for the yellow metal. This has seen analysts cut their estimates for MCX.

“Our traded value estimates are cut by seven per cent and 13 per cent for FY13 and FY14, respectively, due to lower than estimated traded value in FY13. This reduces our FY13 and FY14 estimated revenue by six per cent and 10 per cent and profit after tax by five per cent and 12 per cent, respectively,” say Axis Capital analysts in their post-results note on the company. However, these estimates do not include the potential impact of CTT. Its introduction could hurt volumes, as a section of traders which typically trade on thin margins would get impacted; higher costs (due to CTT) could make these trades less profitable or unviable. According to calculations, every Rs 1 crore of trade will attract Rs 1,000 as CTT.

Analysts believe volumes could contract by 20-45 per cent after the levy. This will also impact MCX’s earnings, partly explained and captured by the correction in its share price. However, the actual impact will only be known after implementation of CTT from April 1 and, how traders react to this.

Rays of hope
In the long run, though, experts believe the impact of CTT will subside, as the market and participants would gradually absorb it. That apart, companies are now allowed to treat earnings from commodity trading as business income (earlier, only profits were taxed and no set-off was allowed for losses incurred), which is positive as it will attract and incentivise genuine hedgers, leading to higher and sustainable volumes. Also, though the Forward Contracts Regulation Act amendments are yet to be enacted, whenever that happens it should lead to higher volumes. For, participants such as foreign institutions, banks and other intermediaries would then be allowed to trade in the commodity segment. Once options are introduced, it could add to volumes; globally, the options segment is about half of total volumes.

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