Stake sale a big boost for Financial Technologies

It will not only improve liquidity, but also boost the company's earnings

Amid the gloom, there is some good news for the shareholders of Financial Technologies (FT), as the company has announced sale of its entire stake in a Singapore-based exchange for $150 million or about Rs 930 crore. While the deal will provide the company significant funds, its earnings will also get boosted, considering that the Singapore-based exchange is making losses.

The deal involves sales of FT’s 100 per cent stake in Singapore-based Singapore Mercantile Exchange (SMX) and its subsidiary, SMX Clearing Corporation (SMX CC). These entities commenced business in August 2010 and recently completed three years. In FY13, based on the current rupee-dollar exchange rate, their combined sales turnover stood at Rs 22 crore, while they reported a loss of Rs 103 crore. Thus, if these entities are sold, the losses will cease to reflect in FT’s books and consequently have huge positive impact on the latter’s earnings.

FT had reported consolidated net profit Rs 204 crore in FY13. Further, the company desires to use these funds to become debt-free (consolidated gross debt of Rs 1,464 crore at end-March). Such a move would help save about Rs 65 crore in interest costs, assuming the company’s current cost of funds of seven per cent on Rs 930 crore. Notably, these savings more than compensate the possible loss of profits from NSEL, which contributed Rs 127.4 crore to net profits in FY13.

In terms of valuations of the deal, the Street believes it should be mostly a distress sale. Based on the current exchange rate, SMX was sitting on total assets of Rs 329 crore, with total capital employed at Rs 716 crore. It is believed that so far FT has infused about Rs 400 crore in the SMX and its subsidiary. Based on the deal amount, it appears that FT has managed to get 2-2.3 times its investment, reasonable in the current scenario, particularly given that SMX was having negative reserves (accumulated losses) of Rs 397 crore (at current exchange rate).

After the exit from SMX, FT’s value will be arrived at from its core technology business and stakes in three main or flagship exchanges, namely MCX, IEX and MCX-SX. Its standalone business at eight times its expected net profit of Rs 120 crore is valued at around Rs 1,000 crore. Additionally, value of its 26 per cent stake in MCX is worth Rs 656 crore, based on the latter’s market capitalisation of Rs 2,525 crore.

Besides, value of its 33 per cent stake in IEX is estimated to be Rs 300 crore based on 10 times its expected net profit of Rs 90 crore for FY14. Put together, the total value of the core assets and the stakes works out to Rs 1,954 crore as against FT’s current market capitalisation of Rs 468 crore, based on Tuesday’s closing price of Rs 185. Even if one assumes a holding company discount of 20 per cent for its stake in MCX and IEX, its worth is about Rs 765 crore, taking the total worth to Rs 1,765 crore.