So, what’s the subscription offer? Here’s the review of the MCX IPO…

Multi Commodity Exchange of India Ltd., the leading commodity exchange of India is coming up with its IPO of 67,27,378 shares of Rs. 10 each. The IPO price band has been fixed at Rs. 860/- to Rs. 1032/- per equity share. The offer opens on February 22th and closes on February 24th, 2012. Investors can subscribe to the IPO in market lot of 6 shares and multiples thereof.

Tell me more about MCX…

Incorporated in 2003, Multi Commodity Exchange of India Ltd (MCX) is a market leading electronic commodity futures exchange. It is a de-mutualised exchange and has received permanent recognition from the Government of India on 26 September 2003, to facilitate nationwide online trading, clearing and settlement operations of commodities futures transactions.

There are five officially recognized electronic multi-commodity national exchanges in India – MCX, NCDEX, NMCE, ICEX and ACE. These five national multi-commodity exchanges accounted for 99.5% of the turnover of commodity futures contracts traded in India. MCX is the largest among these and has above 80% of the market share of the Indian commodity futures exchange industry.

As on date, MCX offers trading in 53 contracts across sectors like bullion, metals, energy, weather and agricultural products. The Exchange is the world’s largest in Silver, the second largest in Gold, Copper and Natural Gas, and the third largest in Crude Oil futures in terms of number of futures contracts traded.

Who are the people/investors behind MCX?

Financial Technologies (FTIL), the promoter group of MCX, owns 31.18% of its equity capital. Jignesh P. Shah, Vice Chairman and Non-Executive Non-Independent Director, is a first generation entrepreneur and the founder/promoter of the Financial Technologies group of companies. Prior to establishing FTIL, he was with the BSE, where he was responsible for designing and implementing the technology platform of the exchange.

Other large shareholders of MCX include financial institutions and other entities from the financial sector, such as State Bank of India, FID Funds (Mauritius) Limited (an affiliate of Fidelity International), Euronext N.V. (an affiliate of NYSE Euronext) and Merrill Lynch Holdings (Mauritius).

Use of IPO Proceeds…

This IPO is an offer for sale of equity shares by investors (and not promoters) holding in MCX. This will help improve liquidity and valuation for MCX. It will also help in determining the fair value of the company, which may help in raising equity in future at better prices. However, the company won’t get any share of the proceeds raised in the IPO. The table below lists the companies and the number of shares on offer for investors. Also indicated is the capital gains each company would make on its initial investment.

The table below indicates institutions not selling their stake in IPO

There are five officially recognized electronic multi-commodity national exchanges in India – MCX, NCDEX, NMCE, ICEX and ACE. These five national multi-commodity exchanges accounted for 99.5% of the turnover of commodity futures contracts traded in India. MCX is the largest among these and has above 80% of the market share of the Indian commodity futures exchange industry.

What sets the company apart? Here is the analysis of MCX

1. MCX’s Financial track record

From humble beginnings, MCX has grown to be a behemoth in Indian commodity derivatives trading business. The company has doubled its sales in last four years and has grown at 33.8% five year CAGR. The EBITDA margins have been close to 60%. On the bottomline front, the company has grown its EPS by 30.04% 5 year CAGR. The EPS growth has been muted due to high fixed costs involved in the early stage and due to profit received from sale on investments in a few of the prior years. The company also enjoys a high RoE of >60% and a negative working capital cycle. Considering all this, we can be relatively confident on the financials of the company.

2. MCX Leadership position in  commodity trading in India

MCX is India’s largest and the world’s 5th largest commodity derivatives exchange. It is also the 9th largest derivatives exchange in the world in terms of volumes traded. It has ~5% share of world’s derivatives trading market. This has enabled the company to benefit from long term opportunities. During FY 07-11, value traded on the exchange grew at a scorching pace of ~45% CAGR.

Increased speculation in bullion & metals space, high prices of commodities and increased volatility has led to an increased demand for hedging and higher speculation. MCX has a diversified product suite that is relevant not only to the Indian market but also caters to the global audience. Growing importance of emerging markets has also led to greater investor participation. MCX has also benefitted from increasing participation from the retail segment.

3. Exchange-listed futures are non-fungible

The term ‘Non-fungible’ means that the contracts created by MCX are traded and cleared solely by MCX. The lack of transferability provides it with a high level of volume and price protection. This makes the business model more stable and supports top-line growth. Furthermore MCX’s leadership position in commodities (especially in base metals, energy and bullion) futures in India gives it an inherent edge. One can verify this by looking at examples of new exchanges like ICEX by Indiabulls and Ace commodity exchange by Kotak which have failed to pose a strong challenge to MCX. Even older ones like NCDEX have been unable to capture market share from MCX, especially in metals, bullion and energy futures where MCX is the undisputed leader.

4. Business Model is scalable

The business model of MCX is highly scalable and has the potential to generate better margins at greater volumes. MCX has made significant investments in developing operating infrastructure, including technology systems, to support anticipated growth and increase in the demand for products. The current technology infrastructure is sufficient to handle daily trading volumes of up to 1,00,00,000 trades a day, much higher than the current requirement. Given the high fixed cost and low variable cost structure of MCX, increase in volumes traded translates to increased EBIT margins. Global exchanges like CME & ICE, operate at ~60% operating margins, MCX enjoys EBIT margin of 50% (FY10). One can expect margins to improve as trading activity increases on the exchange. Thus the overall business model is highly scalable and offers potential for economic growth of MCX’s business with limited incremental costs.

5. Increased room for dividends in future due to unique business model

Global exchanges are high annuity, low Capex and high dividend yielding companies. Global exchanges pay as high as 70-80% dividend. MCX, historically, has paid an average dividend of 25%. Thus going forward the company will likely have a higher dividend pay-out ratio. This is just an expectation, looking at what its global peers have paid out. Whether the company actually pays out such high dividends is something that remains for the future.

6. Growing market presence and participants

As on 31 December, 2011, MCX had 2,153 members nationwide with more than 2,96,000 terminals spread over 1,572 cities and towns in India. Management has indicated that it intends to continue to increase the number of participants by introducing newer products on the Exchange, by expanding to more geographical areas and by efforts to disseminate knowledge and information about the commodity futures industry. Going forward, the Management plans to establish and grow presence in additional regions across India.

But what are the concerns?

1. Negative regulations may  impact MCX

Media reports suggest that government may be contemplating imposing Commodity Transaction Tax in the current budget. When Securities Transaction Tax (STT) was imposed on trading in equities, the equity market volumes declined by more than 20%. It has been observed that day traders moved to commodity trading after the STT was levied on trading in equities. So any such move may be negative for the company.

2. MCX is exposed to a fall in prices of commodities

If one were to look at historical volume and value traded data on MCX, one finds that much of the growth in the value traded has come from increase in gold and silver prices rather than increase in the volumes traded in the exchange. Hence the growth prospects of the company may be negatively impacted in case prices of gold/silver price fall.

3. Aggressive investments by promoter group can be an overhang

The promoter group of MCX, Financial Technologies (FTIL) has been very aggressive in expanding its business by investing and promoting new exchanges across the world. This has led to FTIL reporting losses in past few years. As the business is a high fixed cost, low variable/incremental cost business, this leaves the promoters open to business risks in future. Any detrimental effect on promoters may harm MCX in the future.

SWOT Analysis of MCX

So, should you invest in the MCX IPO?

According to MoneyWorks4me analysis, at the IPO price band of Rs. 890 -Rs. 1032, MCX would be trading at a FY12 (annualised) P/E ratio band of 15.6x to 18.8x. If one assumes a conservative EPS growth rate of 25% for FY13, it would be trading at P/E of 14.7x implying a significant discount (10-15% at the average P/E band of 16.5-17.0) to global peers despite strong growth potential for the future.

The IPO price range is therefore at a significant discount to its global peers ICE and CME despite having strong growth prospects. MCX also provides EBITDA margins of >60%, RoE of >60%, a negative working capital and a debt free balance sheet.

Considering the excellent future growth prospects and the attractive valuation, we advise retail investors to consider subscribing to the issue from a long term perspective.

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Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

The Banking industry plays a dynamic role in the economic development of a country. The growth story of an economy depends on the robustness of its banking industry. Banks act as the store as well as the power house of the country’s wealth. They accept deposits from individuals and corporates and lends to the businesses. They use the deposits collected for productive purposes which help in the capital formation in the country.

Today, the Indian Banking System is known the world over for its robustness. The Reserve Bank of India is the central/apex Bank which regulates the functioning of all banks operating within the country.

Structure of Indian Banking Industry

The banking system, largely, comprises of scheduled banks (banks that are listed under the Second Schedule of the RBI Act, 1934). Unscheduled banks form a very small component (function in the form of Local Area Bank). Scheduled banks are further classified into commercial and cooperative banks, with the basic difference in their holding pattern. Cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act and work according to the cooperative principles of mutual assistance.

Major Players in the Indian Banking Industry

Public Sector Banks (SBI and associates + Nationalised banks) control more than 74-75% of the total credit and deposits businesses in India whereas Private Sector Banks around 17-18%.

How does the industry work? Here is the analysis…

The banking industry in India is highly regulated. Few important regulations are mentioned in the diagram below:

The core operating income of a bank is interest income (comprises 75-85% in the total income of almost all Indian Banks). Besides interest income, a bank also generates fee-based income in the form of commissions and exchange, income from treasury operations and other income from other banking activities. As banks were assigned a special role in the economic development of the country, RBI has stipulated that a portion of bank lending should be for the development of under-banked and under-privileged sections, which is called the priority sector. Current rules stipulate that domestic banks should lend 40% and the foreign banks should lend 32% of their net credit to the priority sector. On the cost sides, the major items for a bank are interest paid on different types of deposits, bonds issued and borrowings, and provisioning cost for Non-performing Assets (NPAs).

The banking business can be broadly categorized into Retail Banking, Wholesale or Corporate Banking, Treasury Operations and Other Banking Activities.

Retail banking segment is the highest margin business as compared to other business segments in the banking industry. Currently, ICICI Bank is the largest players in this segment in India. Other major players in this segment are SBI, PNB, HDFC Bank, etc. Wholesale banking segment in India is largely dominated by large Indian banks – SBI, ICICI Banks, PNB, BoB, etc.

A bank has to categorise its entire investment portfolio into three headings: Held-to-Maturity (HTM), Available-for-Sale (AFS) and Held-for-Trade (HFT). The investment categorized as HFT cannot be transferred to other categories. The investment, categorised as HTM can be transferred into AFS category and AFS to HTM category.

So far, we have discussed the structure and Business model of the Indian Banking Industry, which is entirely different from manufacturing and other businesses. For today, we stop here

So, see you next week with the second article on the Indian Banking Industry, where we will discuss its past performance, growth drivers, key concerns and the future prospects.

VALUE INVESTING

Derived & developed by Benjamin Graham & David Dodd in the 1930s and then popularized by the legendary Warren Buffet, this approach sees investors opting for stocks which seem to be undervalued with respect to some fundamental parameters.

One of the main distinguishing characteristics of value investors is that they usually end up doing the opposite of the rest. When the bulk is going into stock shopping overdrive, this one turns to selling. On the other hand, when the flocks get jittery and start to bail on a particular stock, it’s a signal for these investors to start buying.

Value investors pay attention to factors like high dividend yields and low P/E ratios, but the selection of companies is based on certain criteria:

1. The business makes long-term sense
2. It has a competitive edge
3. It has trustworthy and growth-oriented management
4. The stock can be bought at a discount price

A good example of the value investing strategy would be Tata Steel.

Since some criticize this method by saying there’s no surety in the estimate of worth, a value investor uses a margin of safety. Buying at a great bargain ensures that if the stock’s a miss, the blows won’t be too hard.

GROWTH INVESTING

Here the investor looks for stocks with growth potential. The focus is on newer and expanding companies which are likely to rake in the profits at some point in the future at an exponential rate; much higher than the industry or the market. This strategy yielded exponential returns to investors in the 1990s, during the dotcom bubble, when technology stocks were in a growth phase!

Growth investors believe that a company which re-invests into bettering its business is one that is bound to flourish. There are of course some factors to consider in the short listing of a growth company.

1. The company should be able to  grow substantially faster than others
2. Should be from rapidly expanding industries especially those related to new technology
3. Profits are realized through capital gains and not dividends as nearly all growth companies reinvest their earnings and do not pay a dividend

A good example of the growth investing strategy is Jubilant Foodworks.

The downside to this method is that growth investors don’t pay much heed to the buying price of stock. So if an investment should go bad, they could be left with a more than sizeable loss.

Value and Growth investing – A comparison:

GARP Strategy

Value and growth investing are two entirely different approaches to stock selection, yet a well-known investor, Peter Lynch created a new strategy by combining the two.

Growth at Reasonable Price (GARP) investors look for companies that are showing consistent earnings growth above broad market levels (a tenet of growth investing) while excluding companies that have very high valuations (value investing).

The Biocon stock proves to be a perfect example for the GARP strategy.

The criteria which GARPers thus look for in a company fall right in between those sought by the value and growth investors.

To Conclude:

There have been numerous studies on the subject of value versus growth investment strategies done for the US stock markets. These studies included comparison of value portfolios (stocks with the lowest P/E, P/BV, etc.) to growth portfolios (stocks with the highest P/E, P/BV, etc.) to judge which portfolios had given better returns.

The result was that value portfolios had outperformed the growth portfolios in all of the studies. Infact, in some of them the value portfolios were compared to a benchmark index and it was seen that they had outperformed the benchmark index as well.

Concluding, it’s important to remember that stock investing offers different strokes for different folks. Once you’ve identified your investment goals and personality, you can choose and stick with the style that speaks for you best. However, history shows that value investing has tended to be a more profitable way to invest in stocks.

We at MoneyWorks4me.com also believe that by adopting value investing principles, investors can significantly reduce the risk associated with investing in stocks and maximize their returns. So, do go ahead and check out which stocks offer value currently on MoneyWorks4me.com

Which stock investing strategy would you go for? And which stocks do you think currently are the best value, growth or GARP buys? Do comment and let us know.

Many investors have burned their fingers in a similar manner, searching for good stocks to invest in. All this stems from the lack of a strong starting point that can help investors reach a shortlist of sound investment-worthy companies available at an attractive price.

Investors are always in search of companies worth investing in; companies that can give them good returns yet minimize their risk at the same time. But finding such stocks can be cumbersome without any filtering criteria.

To address this problem, MoneyWorks4me.com has launched a simple and unique Stock Picking Tool – MoneyWorks4me Filter. With this you can identify investment-worthy stocks available at fire-sale prices, at the click of a mouse.

So, how does the MoneyWorks4me Filter help you invest in the best stocks safely?

The MoneyWorks4me Filter helps you arrive at a shortlist of stocks using a filtering criterion that allows you to identify companies/stocks from the whole universe of stocks. It helps you identify the strong and best stocks from this list and weed out the weaker ones in a few seconds.

As investors we are always searching for stocks that will minimize our risk as well assure good returns. For this you should always look for stocks that are fundamentally strong and undervalued at the same time. The MoneyWorks4me Filter helps you do just the same by short-listing safe stocks based on 2 main criterion i.e. their Fundamental Strength (Green, Orange or Red) and on their Price Attractiveness (Current Price vs. MRP).

a) Select a fundamentally strong stock:

While short listing a company it is always important to find a company that has had an excellent financial track record over the last 10 years. Such a company will most likely have a moat/ a competitive advantage that has helped to be a winner in tough times too. While a past performance is not a guarantee of a similar future, it does give us enough clues for the future.

MoneyWorks4me assesses the fundamental strength of a company by analyzing its 10 YEAR X-RAY i.e. financial track record and then assigns a color code to the company’s financial track record –

• Green (Very Good) if it has had an excellent financial track record
• Orange (‘Somewhat Good’) if there have been just a few bad performances over the years
• Red (Not Good)

It is advisable that investors screen on the basis of Green and only if you are willing to take on more risk, then you can go ahead and screen on the basis of Orange. Selecting ‘Red’ companies as a filter is not advisable as these are the companies that have had a dismal performance over the years and hence can be very risky.

b) Next, the stock should be attractively priced:

In order to get returns, you have to make sure that you buy the stock when it is undervalued.  After you have filtered companies on the basis of a color code for their fundamental strength, now further screen them on the basis of their valuation i.e. if they are overvalued or undervalued. MoneyWorks4me calculates the right value (MRP) of a company, which helps assess whether the company is overvalued or undervalued.

Thus, this tool helps you identify fundamentally strong stocks that are undervalued, hence worth investing in. At the same time it also helps you screen stocks which are overvalued and that can be considered for selling.

c) Compare after filtering:

Once you have completed the process of narrowing down on stocks – let’s say you have filtered on the basis of Green fundamental strength and undervalued – You may get a shortlist of 10-15 stocks. This list further allows you to compare these companies on the basis of certain criteria like Market Capitalization (large-cap, mid-cap and small-cap), Net Sales, P/E etc. After this you are just one step away from selecting a good company worth investing in and you just need to go ahead and Evaluate the company.

This filter will help you invest safely as you can narrow down upon the best companies to invest in within seconds. By selecting fundamentally strong companies that are undervalued currently, you are minimizing your risk as well as assuring good return for the long-term.

MoneyWorks4me Filter is a special stock picking tool that’s available only to our subscribers. Now you can get unlimited access to MoneyWorks4me Filter along with an array of features essential for Safest stock investing at much affordable price. Check out our plans

Fundamental investing and technical investing are the two main schools of thought that have emerged in the stock investing world. Which one is the best for you? And which style would be the safest? These are some of the questions you should ask when trying to figure out which style works best for you.

So, let’s look at 2 of these styles of analysis in detail.

a)    Fundamental Analysis

Fundamental analysis is a method preferred by those with long term investments in mind. While sifting through the information, a fundamental analyst pays attention to the finer details.  Rather than nitpicking over price, he focuses on whether the worth of the stock is likely to climb.

The analysis begins with the financial records of the company – revenues & profits, assets and liabilities are thoroughly examined to understand a company’s intrinsic worth.

Once the numbers are out of the way, the investor turns his attention to the quality of the company. Here the key elements to consider are the brand and management, technology and competitive clout.

This fundamental approach to stock picking is based on two main assumptions:

1.    Market Worth vs. True Worth
The market price of a stock isn’t necessarily the same as its true value. So, the goal of a fundamental investor is to identify and buy stocks that are being sold at less than their determined worth.

2.    Fundamentals = Growth
The fundamentals of a company are what truly determine its long-term worth.  If it boasts a strong brand with growth potential, it will eventually pay off.

Though strongly advocated by Warren Buffet, this technique still pulls in some negative feedback:

• The list of factors to consider for fundamental analysis may seem never-ending
• Your estimate of the real worth of a company might not really be spot on
• It might take a while for the true worth of the stock to be actually reflected in the stock price

A few strategies like value investing, growth investing or a combination of value and growth are few forms of fundamental investing popularly followed.

b)    Technical Analysis

On the opposite end, a technical analyst subscribes to a completely different school of thought. Here the focus is on two main factors – price and volume.
The investor uses tools like charts and indicators to spot market patterns which should, according to theory, re-occur. Better for short-term traders, the goal here is to make a quicker rather than bigger buck.

This technique is based on three assumptions:

1.    Price reflects everything
The assumption here is that price reflects everything that has or could affect a company including the fundamentals. Therefore a technical investor believes there’s no need to assess these core factors individually.

2.    History repeats itself
Investors tend to react similarly to certain situations. This psychology is what causes repetition in the market.

3.    Movement in Trends
Trends cause fluctuations in price. Once it’s set in motion, a trend is likely to continue in the same upward or downward spiral.

On the flip side of technical analysis, there are a couple of points to consider:

• By the time a trend is spotted, it might already be on its last legs, so the rewards might not be much.
• The belief in the accuracy of patterns is what causes investors to react in a certain way, so its trader psychology, rather than the value of stock, which creates a trend.
• Past price doesn’t necessarily impact future movement.

Fundamental Analysis and Technical Analysis – A comparison:

At the end of the day, there are pros and cons to any of these options. And one should remember that there is no foolproof method for investing in stocks. However, a combination of these strategies may work best for investors. MoneyWorks4me.com, encourages investors to analyse the company with a fundamental perspective and buy it for the long-term when it is attractively priced. You can later use the charts to time your buy and sell decisions to get more bang for your buck. Many successful investors use the fundamental approach to find out good stocks to invest in and then use the technical charts to time their investments correctly!

Follow this space for our article on various other strategies like value, growth and GARP investing next week.