The Hindu Business Line : Financial Technologies: Buy

Association with exchanges such as MCX and DCGX would ensure stable business flow in terms of regular technology upgradation required by the exchanges to manage growing volumes.

Developing commodity markets offer bright prospects.

Investors with a long-term horizon can consider adding the Financial Technologies (FTIL) stock to their portfolio. The stock's steep valuation reflects the potential that FTIL's seven new businesses started in 2005 may have over the next few years.

Financial Technologies can be considered as a proxy play on the Indian commodities market and expansion in the financial sector.

Proxy play on commodities

FTIL has a majority stake in Multi Commodity Exchange (MCX), National Spot Exchange for Agricultural Produce (NSEAP) — a spot exchange for commodities and National Bulk Handling Corporation — a national warehousing and supply-chain company that provides end-to-end services for handling agricultural commodities.

Presence in these nascent businesses would mean that FTIL may play a major share in the development of the commodities sector.

FTIL has close to 64 per cent stake in MCX. It would offer close to 10 per cent in the impending public offer. The value of FTIL's holding in MCX is estimated to be close to Rs 1,000 crore.

Initiatives such as trading in commodity indices, intangibles, permitting institutional investors to participate in commodity derivatives trading and inclusion of options, would increase the depth of the market over a period of time.

These developments are yet to happen due to regulatory constraints. Having commenced operations just two years ago, commodity trading is still at a nascent stage.

There appears to be scope in terms of new products, indices and new participants.

Volumes have been growing at a fast pace and, in January, MCX emerged as the largest commodity exchange in India, taking market share from its rival, National Commodity and Derivative Exchange (NCDEX). We view MCX as a major driver for FTIL's growth over the next five to ten years.

FTIL's latest venture — NSEAP — would facilitate price discovery and bring together producers and traders of various agricultural commodities and offer farmers and traders a spot exchange for their produce. There is immense scope for such initiatives that are new to India. NSEAP will commence operations in June 2006.

Core business picking up

FTIL has an 80 per cent market share in technology solutions that facilitate trading and related activities. A number of brokerage houses are on an expansion mode and upgrading technology for their trading platforms and introducing online trading. This could sustain the growth momentum in its core business. Moreover, its association with exchanges such as MCX and DCGX would ensure stable business flow in terms of regular technology up gradation required by the exchanges to manage growing volumes.

Spreading wings abroad

FTIL is now tapping the West Asia market. Dubai Gold and Commodity Exchange (DCGX) — a commodity derivative exchange with the facility to connect electronically from anywhere in the world — has commenced operations in November 2005. Starting off with gold futures, the product range is being expanded to include silver futures, currency futures, steel and fuel oil futures.

Dubai being one of the main global trading centres, the exchange is strategically located to operate in the time zone that other global exchanges do not function. This venture is likely to start paying off from FY-07 onwards. FTIL has a 40 per cent stake in the company and another 10 per cent through MCX. Another subsidiary — Financial Technologies Middle East — will scout for opportunities in West Asia for technology solutions in the financial arena.

Strong fundamentals

The company's unique business model has the potential to generate superior returns on the capital invested. A zero-debt company with operating margins of close to 45 per cent in its core business, FTIL has the potential to generate huge surplus cash, thus commanding premium valuation now.

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