Singed by NSEL woes

The crisis at the National Spot Exchange Ltd (NSEL) saw the stocks of both its promoter, Financial Technologies (FTIL), and group company, MCX, witness a free fall last week. The fall has levelled valuations of these stocks to 4 times and 7 times their trailing earnings.

FTIL plunged 74 per cent to Rs 148. The suspension of trading in certain contracts at National Spot Exchange and the possibility of further curbs on its one-day forward contracts could have a direct impact on FTIL. In 2012-13, National Spot Exchange accounted for over half of FTIL’s consolidated profits. Given that the suspended contracts make up 48 per cent of the revenue for NSEL as per the exchange’s June factsheet, the earnings at risk for FTIL if the suspended contracts are not re-launched, would be about Rs 66 crore. This translates into an over 25 per cent dent to its per share earnings.

MCX in a spot

There seem to be less justification for the punishment meted out to the stock of MCX, which has no direct linkage to the spot exchange and derives no business from it. The stock is down 60 per cent since its listing in March 2012. Much of the pain was caused last week when the stock hit the lower circuit (20 per cent) both on Thursday and Friday. The clarification by MCX that there will be no impact did little to calm the market.

However, MCX has been facing business-related pressures in recent quarters. Even before the carnage last week, the stock was down 38 per cent from the issue price mainly on worries about moderating trading volumes in bullion, the newly-imposed Commodities Transaction Tax and other similar issues.

The financial performance in 2012-13 disappointed with sales 5 per cent lower than the year before, and profit growing only 4.4 per cent. In 2011-12, sales increased 43 per cent and profit grew 66 per cent.

Falling gold prices combined with the introduction of the commodity transaction tax on non-agriculture futures contracts (MCX dominates the market) has seen the turnover on the exchange drop over 50 per cent on July 1 — the first day of enforcement of the tax. The public issue price of MCX last year (Rs 1,032) was around 18 times its annual earnings. At the current price of Rs 408, the stock discounts its trailing 12-month earnings by just around seven times.

Regulatory scrutiny

However, while valuations do seem supportive, both stock prices may remain under pressure as the regulatory reaction to the National Spot Exchange episode becomes clear over the next few weeks. Even if the postponed settlement of contracts proceeds smoothly, regulators are likely to come up with new rules for the one-day forward contracts that made up nearly half the National Spot Exchange’s volumes.

A completely fresh set of regulations for spot exchanges can also not be ruled out. Such moves will mean considerable uncertainty about the prospects of the exchange and thus FTIL, over the next few months.

Investors in MCX meanwhile should probably brace for higher regulatory scrutiny of the exchange and of commodities trading itself, until these issues are sorted out.

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