Following the Forward Markets Commission’s order declaring Financial Technologies (India) Ltd as unfit to run an exchange, the securities market regulator has also asked the company to divest its stake in all equity exchanges. FTIL now has three months to divest its holdings in all stock exchanges including the MCX-SX and the National Stock Exchange. But, the news had no much impact on the stock price of FTIL.

This is because the market also expects regulators overseas to make a similar move.

In November, FTIL sold its stake in SMX, the commodity and currency derivatives exchange in Singapore. Reports say this followed an order from the Monetary Authority of Singapore, the country’s financial services regulator.

Very recently FTIL is said to have received a show cause notice from the Bahrain (Financial) Exchange.

Given that FTIL’s international subsidiaries are loss-making, selling off the non-core businesses is seen as positive.

In 2012-13, the company’s standalone profit was ₹323 crore, while the consolidated profit after tax was ₹227 crore. FTIL reported a total loss of ₹215 crore for the year in six international subsidiaries, all commodity and currency derivative exchanges.

What’s left?

Hiving off the stake in overseas ventures is good for FTIL as its standalone business is quite profitable. In FY13, the front and back office solutions offered to exchanges plus licensing fee and annual maintenance cost from trading applications sold to brokers brought a revenue of ₹439 crore. The net profit was ₹323 crore with a margin of 49 per cent.

FTIL’s standalone earnings per share for FY13 works out to ₹70. With the current market price of the stock at ₹380, the price earnings ratio works out to five times.

Till last year, FTIL was sharing profits of the National Spot Exchange and the National Bulk Handling Corporation (NBHC) — the two subsidiaries — and also the MCX and the Indian Energy Exchange (33.486 per cent holding) — two associate companies. But, as it hives off stakes in all exchanges, its standalone business will drive growth.

Free cash?

Revenue growth of the standalone business stood at a compounded annual rate of 15 per cent between FY11 and FY13.

By selling stake in SMX, FTIL received $150 million, close to ₹930 crore. By offloading shares in NBHC, the company made ₹250-300 crore. FTIL will raise a large sum when it disposes off shares in the MCX too. The cost of investments of 26 per cent stake in MCX in FTIL’s books is at ₹10.6 crore, but the investment’s market value now is ₹670 crore. The company will raise ₹618 crore by selling 24 per cent stake in MCX.

With FTIL being ordered to move out of its other exchange ventures too, there will be more cash inflows. FTIL holds 2.71 crore shares in MCX-SX and 10,000 shares in National Stock Exchange and is required to dispose off these in three months. But, it is not all positive news for FTIL. Towards the end of FY13, FTIL had ₹598 crore of ECBs outstanding. Also, it has given large sums of money as loan to NSEL, apart from corporate guarantees, which have to be only written off as bad loans.

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