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Brokerage Recommendations

Friday, September 14, 2012

Motilal Oswal calls a ‘Buy’ on MCX India
CMP: Rs. 1255    Target Rs. 1440

Dominant share; future ready; high growth potential: Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodities futures exchange, with near monopolistic market share (86% in FY12). Our expectation of sustained market leadership stems from its technological edge and future readiness.

MCX’s volumes have grown at a CAGR of 47% over FY07-12. Future potential remains exciting given: [1] likelihood of new products and participants with the FCRA Bill, [2] with 2m client accounts as compared with 19-20m demat accounts, the industry has only scratched the surface with respect to potential volumes. We believe value from MCX-SX (Stock exchange promoted by MCX and FTECH in 2008) is more definite than merely option value. Policy to maintain ~50% payout ratio is a key valuation positive. Our target price of INR 1,440 implies 23% upside. We initiate coverage with a Buy rating.

Leading exchange, with contract volumes matching global leaders: Multi Commodity Exchange of India Limited (MCX) is a state-of-the-art electronic commodity futures exchange, offering futures trading in over 47 commodities, mainly including Gold, Silver, Copper and Crude Oil. It began operations in November 2003, and has over 86% share (as at 31 March 2012) of the Indian commodity futures market. In terms of contracts traded in CY11, it is the third largest globally, second-largest in Gold, largest in Silver, second-largest in Natural Gas, and third-largest in crude oil.

Adding potential value from MCX-SX; Buy with a TP of INR 1,440, 23% upside: While we value MCX’s standalone business at INR 1,330, we separately assign a value to MCX’s stake in MCX-SX (including warrants). The transactions in MCX-SX stake that happened in FY10 valued the exchange at ~INR45b. The latest transaction in National Stock Exchange of India (NSE) stake valued NSE at INR171b. Assuming a revenue base of INR1.3b in FY14, at 11x FY14 Sales, MCX-SX’s valuation is INR14b (much lesser than that implied in the last stake sale). Stake in MCX-SX (including warrants) contributes additional INR110 per share to MCX.

Our target price is thus, INR 1,440 (INR 1,330 for standalone business + INR 110 for warrants in MCX-SX). Buy for 23% upside. We expect volumes CAGR of 15% over FY12-15 and a PAT CAGR of 13% over this period. Also, the ROE should sustain its level in the high 20’s. The company’s decision to maintain its payout ratio at ~50% in the future too is a key valuation positive.

Centrum calls a ‘Buy’ on BASF
CMP: Rs. 664    Target Rs. 802

BASF India is a part of BASF SE, the largest chemicals company in the world. BASF India is likely to show strong growth momentum on the back of massive investment of Rs 10bn on a new facility and consolidating its niche chemicals businesses with itself. Rising agri growth, income levels and urbanisation are expected to aid overall growth as BASF offers niche and innovative products and solutions to the segment it represents. Strong patronage will help BASF India to introduce new products to customers. We believe BASF is a secular growth story which offers a safe bet. Hence, we initiate coverage on BASF India with a ‘Buy’
Focus on niche segments to propel growth: BASF’s focus on niche segments like agricultural solutions, care chemicals, nutrition & health and paper chemicals, coatings and construction chemicals is expected to fuel growth. New product introductions and innovative solutions for these segments make BASF a preferred supplier of these chemicals.

Significant capex to cater to the growing Indian market: BASF has proposed over Rs 10bn capex with a new facility at Dahej. This facility will be operational by 2014 and will cater to growing segments including care chemicals, polyurethanes, coatings and the paper industry. This investment will more than double the gross block of the company and has the potential to generate revenues of over Rs8-10bn annually in initial years.

Potential delisting candidate: BASF SE has upped its holding in BASF India from about 53% in FY09 to over 73% currently. Following the precedent set by other MNCs, BASF India could also delist. Historical data suggests that delisting has been favourable for minority shareholders with significant value generation. Premium for secular growth, Buy: We estimate a CAGR of 14.7% in revenues, 23.4% in operating profit and 28.0% in PAT for BASF India over FY12-14E. This is backed by robust growth in agricultural solutions, performance chemicals and functional solutions businesses along with margin expansion. Post announcement of merger of BASF entities with BASF India, the average P/E multiple of the company in the last two years was about 21x. We believe BASF deserves such premium valuations and hence value the stock at the same average multiple of 21x FY14E EPS of Rs38.2. We thus arrive at a price target of Rs 802 and initiate coverage with a ‘Buy’ rating on the stock.

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