A year after the break out of the National Spot Exchange Ltd (NSEL) scam, the stock of MCX (Multi Commodity Exchange) is up 20 per cent from the pre-scam levels. However, FT (Financial technologies), the flagship company of the Jignesh Shah group , is still in the pit.

The difference between the two stocks is that Jignesh Shah will be exiting his entire stake in MCX soon even as hecontinues to control FT.

Rising from the ashes After making a brilliant debut in the bourses through an initial public offer in 2012, MCX’s woes began with the NSEL fiasco. The exchange’s operation was also severely impacted by the introduction of the commodity transaction tax (CTT) in July 2013. A tax of 0.01 per cent was imposed (on the sell side) on all non-agri commodities including gold, silver, industrial metals and energy. This increased the cost for arbitrageurs, already operating on wafer thin margins. Many traders wound their positions and made an exit. MCX, which is the largest commodity bourse for non-agri products in the country, saw its volumes drop to a third. This reflected in the MCX’s financial results for 2013-14. At ₹319.72 crore, its revenue dropped 36 per cent and profits halved to ₹153 crore.

The stock, however, trades around ₹780 now, up from ₹640 during the pre-scam period. Investors appear to be expecting better prospects for the exchange once it is free from the control of Jignesh Shah.

In December last year, the FMC held Jignesh and FT “not fit and proper” to run any exchange. It then gave MCX time till April to see that its tainted promoter exits. Shah, however, let the deadline pass-by waiting for a better price for his stake in MCX. The annoyed FMC then sternly told MCX that if FT doesn’t exit by August, it will not approve any new contracts on the exchange. Fearing that such a move will kill MCX, he hastened the stake sale process. On July 8 FT announced that it was selling its 2 per cent stake in MCX to Rakesh Jhunjhunwala. A week later, FT offloaded almost four per cent stake in the open market. On July 20, came the news of FT selling 15 per cent stake in MCX to Kotak Bank. Market experts believe that with Kotak Bank’s entry, things will improve for MCX as the group will establish a governance framework and restore investor confidence.

At the current price, however, MCX stock trades at premium to its global peers – CME and ICE, and looks expensive.

FT still under pain Being the maincompany of Jignesh Shah, FT has had a tough time in the last one year. It had sold off most of its international bourses and is in the process of exiting from domestic bourses too. The numbers, however, show that FT’s standalone business still holds promise. Its many subsidiaries abroad were diminishing in profitability. But the stock hasn’t come back to levels before August last year. The stock’s price was ₹540 on July 30 last year and now it trades at ₹300.

In 2012-13, FT’s standalone profits were ₹323 crore, while the consolidated profits were a lower ₹227 crore. About ₹127 crore of the consolidated profits (56 per cent) were from NSEL which to an extent made up for losses from the international subsidiaries.

For 2013-14, FT has not reported its consolidated numbers.

Given that FT’s flagship product ODIN is still used by many in the market, there is a scope for growth in the business. However, what now weighs on the company’s stock is the fear that it may bear the brunt of the NSEL’s fall-out. There is an apprehension among investors that FT will be asked to pay the dues to NSEL’s clients that is still pending. Also, last year, NSEL’s auditors withdrew their report on the company’s financials and said that their audit reports may not be relied upon. So, doubts have risen on FT’s consolidated numbers too. Further, in the last financial year, FT reported a loss in its standalone books hit by provisions made for loans and advances made to NSEL. All these will not be recoverable any more.

One good thing for FT is that though it has been forced to move out its exchange businesses, there is a lot of cash that is coming in. Last year it made around ₹900 crore by selling its Singapore exchange SMX. It also made some cash by exiting from National Bulk Handling Corporation. The recent Kotak Bank deal will fetch it ₹459 crore. This apart, there will be cash flow from sale of shares in MCX-SX and NSE too. In a recent press release, FT has said that MCX will continue to use its software. This is also good news given that FT’s standalone business relies on revenues from technology solutions offered to brokerages and exchanges.

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