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World's First Research Report-cum-Financial Model (Customizable)

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Multi Commodity Exchange of India Ltd. operates MCX, India's leading commodity futures exchange, and has recently going public.

We are a firm of independent analysts based in Mumbai, India. Our research is truly independent, since we are not affiliated with any i-bank.

We introduce herewith a new presentation format - 'Fusion of a Research Report and a Financial Model' - 'possibly' for the first time in the global research community. Please excuse us, if you've seen a similar format earlier! Please refer the Disclaimer sheet.

This research report-cum-financial model contains a wealth of information about commodity futures exchanges as an industry, the regulatory environment in India, trading volumes, business model, strengths, financials and earnings estimates of MCX, and global peer financial highlights and valuations. This document is an unlocked spreadsheet and is print-ready.

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  • 1. Multi Commodity Exchange of India Ltd. 27-2-2012Research Report-cum-Financial ModelIndia - Large Cap - Financial SectorMulti Commodity Exchange of India Ltd. operates MCX, Indias leading commodity futures exchange, and is going public.Analysts NoteWe introduce herewith a new presentation format - Fusion of a Research Report and a Financial Model - possibly for the first time in theglobal research community. Please excuse us, if youve seen a similar format earlier! Please refer the Disclaimer sheet.This research report-cum-financial model contains a wealth of information about commodity futures exchanges as an industry, theregulatory environment in India, trading volumes, business model, strengths, financials and earnings estimates of MCX, and global peerfinancial highlights and valuations. This document is an unlocked spreadsheet and is print-ready.Bonus: our proprietary IPO Analysis Checklist is included.The IPO will list soon in India and we believe this report-cum-customizable model will remain relevant. Just plug in the current stockprice, make changes in underlying assumptions or earnings estimates as per your own views, in the relevant sheets, to arrive atvaluations, incl. DCF, and target price.IndexIPO Analysis ChecklistIPO HighlightsInvestment Case & ConcernsIndustryVolumes - MCX v/s NSEBusiness ModelIssue DetailsShareholdingsAssumptionsConsolidated P&LConsolidated Balance_SheetConsolidated CashFlowsDCF WorkingsValuation MatrixGlobal PeersDisclaimer© All rights reservedNitin A. Khandkar, Founder Mumbai, Indianitin.k.ier @ gmail . com
  • 2. Multi Commodity Exchange of India Ltd.Checklist of Data Points relevant to the Analysis of the IPOSr.No.Name of Data Point Data for MCX1 Year of Incorporation 20022 Year of Commencement of Operations 20033 No. of years of track record 84 Management background and expertise, if any Promoted by Financial Technologies5 Focus segments Commodity futures trading6 Segment information - revenues, EBIT margins, profits No segments7 Geographical breakup of revenues, if any None8 % of Revenues coming from group companies, if any Some transactions with FTIL9 Whether present in any unrelated business No10 Market share within industry ~87% share of trading volumes11 Whether inorganic growth contemplated Not indicated12 Promoters’ average cost of acquisition of the company’s shares, pre-IPO Low vis-à-vis IPO price13 Extent of dilution of promoters stake via the IPO 5.2%14 Names of pre-IPO investors See "Shareholdings" worksheet15 Pre-IPO investors’ average cost of acquisition (adjusted for bonus issue) FID: `480 per share (in 2006)16 Pricing of Investments by pre-IPO investors within 12 months before IPO Does not apply17 Whether any pre-IPO investor exiting partly or fully via IPO Yes, see "Shareholdings" worksheet18 Revenue mix for last 5 years Does not apply19 Client concentration data Does not apply20 Order book position Does not applyUtilization of IPO proceeds21 Breakup of Capex into plant, buildings, etc. No fresh issue, no funds infusion22 Status of machinery required, ordered and received as of RHP date Does not apply23 Amount to be utilised for non-critical purposes Does not apply24 Gap in fund raising programme if any (IPO + Debt - Capex) Does not applyExpansion project25 Time lag between date of IPO and completion of expansion project Does not apply
  • 3. Financials26 Consolidated and Standalone P&L, Bal Sheet for last 3 / 5 full years See relevant worksheets27 Consolidated and Standalone P&L, Bal Sheet for latest 3 / 6 months See relevant worksheets28 Quality of disclosures Good29 Ratio analysis Good margins, see relevant worksheets30 EV computation See relevant worksheets31 EPS computation See relevant worksheets32 Comments on Financials Good growth trajectory33 Peer comparison- Installed Capacities, production, utilisation See relevant worksheets- Market shares See relevant worksheetsPost-listing34 Free float - absolute no. of shares 37,738,794
  • 4. CommentsThe gap between date of incorporation and commencement of ops should not be too wideProfessional qualifications and relevant experience of managementIdentify relationships that can hamper profitabilityShould not have unrelated diversificationsThe market leadership position can result in a valuation premiumLikely impact in terms of equity dilutions or higher leverageMention specifically in Exec Summary, highlight huge discount to IPO priceMention if dilution is substantialHighlight in case of good VC / PE namesMention specifically in Exec Summary, highlight huge discount to IPO priceMention specifically in Exec Summary, highlight huge discount to IPO priceSince not a positive sign, highlight if substantialProvide tableProvide tableReview revenue visibility over next 2 yearsHighlight in case of gap between required, ordered and receivedGeneral corporate purposes, etc.Highlight if substantialTo determine how soon cash flows will begin to kick in
  • 5. Return ratios, turnover ratios, othersConsider Mcap post issue, cash and debt as of latest bal sheet, annualise EBITDAMake estimates, else annualise quarterly / half yearly profit, take post IPO equityHighlight revenue growth, dramatic changes in margins, leverage, ROE etc.Follow identical EPS computation for peersMention period of financial statements clearly, below the comparison tableHighlight if no. of free float shares too small - exit may be difficult for QIBs
  • 6. Multi Commodity Exchange of India Ltd.IPO HighlightsMode of Issue Offer for Sale by Selling ShareholdersIssue Size (Amount) at floor / cap price `5.53bn (~$112.3mn) / `6.63bn (~$134.7mn)Issue Size (No. of Shares) 6.427mn Equity Shares of `10 eachEquity Dilution 12.6% of Equity CapitalPrice Band `860 - 1032 per Equity ShareSubscription Period February 22 - 24, 2012BRLMs Edelweiss, Citigroup, Morgan StanleyGrading 5/5 (CRISIL)Market Cap (at floor/cap price) `43.9bn ($891mn)/ `52.6bn ($1.07bn)Free Float Market Cap (at floor/cap price) `32.5bn ($659mn)/ `38.9bn ($791mn)Listing The Stock Exchange, Mumbai (BSE) only
  • 7. Multi Commodity Exchange of India Ltd.Executive Summary1Multi Commodity Exchange of India Ltd. (MCEIL) operates MCX, the predominant, No. 1 commodity futures exchange in India, whichoffers trading in a wide range of commodity futures (49 commodities as of December 31, 2011).2MCX is the also the fifth largest commodity futures exchange globally, in terms of the number of contracts traded and among theleading commodity exchanges in the world, in terms of trading volumes of certain commodities.3MCEIL has been promoted by Financial Technologies India Ltd. (FTIL), a leading software developer in India, which is a technicalservice provider to automated electronic markets in the areas of foreign exchange, commodities, debts, treasuries, securities, bankingand insurance.4The rising popularity of commodity futures trading in India can be gauged by the fact that while the NSE’s cash market segment sawa decline in trading volumes from `36,577bn in 2010, to `27,633bn in 2011, the value of commodity futures contracts traded on theMCX went up from `86,969bn in 2010, to `149,329bn in 2011. Though not strictly comparable, the average daily trading volumes onthe MCX are also substantially higher than in the cash segment on the NSE.5We therefore view MCEIL as an ideal play on the fast growing commodities futures trading segment in India. While commoditiesfutures may involve some amount of risk, an investment in the underlying exchange itself, where these futures contracts get traded,is an ideal hedge against the risks associated with futures trading.6While the IPO is via an offer for sale by FTIL and some institutional investors, all of these are only partly reducing their stake, and notexiting the company fully. As such the proceeds of the IPO will not go to the company, nor is there an equity dilution.7The last issue by MCEIL to an outside investor for cash was to FID Funds Mauritius Ltd. (a Fidelity International affiliate) at an ex-bonus price of `480 per share, in February, 2006. No major equity dilution has taken place during the last 3 years, except allotmentsmade to the company’s ESOP trust, and a bonus issue (1:4) in March, 2011.8 Investment Positivesa Dominant market share within commodity futures exchanges in India.bRising trading volumes: Value of futures contracts traded at MCX grew at 52.3% CAGR between 2007 and 2011. Incidentally, tradingvolumes at MCX are much higher than those in the capital market segment at NSE, though the former is a derivatives exchange, whilethe latter is a cash equities trading exchange.cStock or futures exchanges are inherently profitable the world over, since revenues far outstrip costs, leading to high EBITDAmargins. We believe MCX’s business model is almost risk-free, since sizeable revenues are assured as long as trading volumes remainrobust. Given its favourable variable cost structure, high EBITDA margins can be considered sustainable. In addition, sizeablerecurring ‘other income’ will continue to add to profitability.
  • 8. dIn spite of its focus on technology, MCEIL’s recurring capital expenditure in fixed assets (`8.40Cr, `23.56Cr and `17.89Cr in FY10,FY11 and FY12 YTD respectively) is low vis-à-vis its balance sheet size. We believe MCEIL may either not need to invest heavily incapex going forward, or may be comfortably able to meet the same, from operating cash flows.eMCEIL is a zero-debt, cash-rich company, with a strong reserves position. We expect it to continue to enjoy comfortable return ratios,i.e., RoE and RoCE, going ahead (see sheet Consolidated P&L ). We believe MCX may not require a major funds infusion in the nextcouple of years, by virtue of its sustainable, recurring net operating cash inflows.f The fact that there is no listed peer for MCX in India, may possibly lead to some valuation premium on listing.9 Investment ConcernsiOver 90% of MCEIL’s revenues (96.1% in 9 months to December 31, 2011) constitute transaction fees, which are directly linked totrading volumes. As such, the company’s revenue generating ability may be hampered in case of reduction in trading volumes.However, as stated above, MCEIL continues to generate sizeable, recurring other income.iiJust four commodities, viz., silver, gold, crude oil and copper, account for over 80% of MCX’s turnover by value (90.4% in 9 months toDecember 31, 2011). We view this concentration as a risk, in case prices of any of these commodities, already at high levels, were tocrash.iiiUnder Indian regulations, foreign institutional investors (FIIs), banks and mutual funds cannot trade on commodity exchanges. Also,trading in commodities options is prohibited. This may suppress the valuation premium on the IPO. However these very concernscan well become kickers for the stock going forward, if and when the authorities permit these investors to trade on the MCX and alsopermit options trading.ivThe IPO will list on the BSE only. At a structural level, absence of dual listing (NSE as well as BSE) may possibly impact pricediscovery on listing, and cap future price performance, though not immediately on listing, since it has been observed historically thatstocks listed only on the BSE see lesser liquidity and poorer price performance over a period of time, vis-à-vis stocks listed on bothexchanges.10Based on our EPS estimates of `55.51 (FY12E) and `67.68 (FY13E), the IPO was priced at 18.6x FY12E and 15.2x FY13E on the basisof the cap price. Global leading commodity futures exchanges trade in the range of 9.9x - 16.6x CY12E (see worksheet Global Peers ).However by virtue of the relatively low revenue base vis-à-vis global peers, MCEIL will see higher revenue growth in % terms. Wehad a Subscribe rating on the IPO. The rating will change on listing, depending on the valuations (absolute, and relative to globalpeers) post-listing.
  • 9. Multi Commodity Exchange of India Ltd.Commodity Futures Industry Overview1Futures contracts are derivative products that provide means for hedging and asset allocation. The asset underlying futurescontracts could be a physical asset (e.g. agricultural commodity) or a financial asset (e.g. interest rates, foreign exchange productsand stock indices). A commodity (as traded on an exchange) is an undifferentiated product whose market value arises from theowner‘s right to sell the product rather than the right to use the product. Commodities traded globally on exchanges include crudeoil, gold, copper and agricultural products such as wheat, corn and soybeans.2Commodity futures contracts are commitments to make or accept delivery of a specified quantity and quality of a commodity at aset time in the future for a price established at the time the commitment is made. The buyer agrees to take delivery of theunderlying commodity, while the seller agrees to make delivery. In practice, futures markets are rarely used to actually buy or sellthe physical commodity being traded and only a small number of contracts traded worldwide each year result in delivery of theunderlying commodity. Instead, traders generally offset (a buyer will liquidate by selling the contract, the seller will liquidate bybuying back the contract) their futures positions before their contracts mature.3Commodity futures contracts are primarily made available through a centralized trading or computerized matching process, withbids and offers on each contract traded publicly. Through this process, a prevailing futures market price is reached for eachcommodity futures contract, based primarily on the laws of anticipated supply and demand. Many markets abroad also offer tradingin options contracts in commodities.The Global Commodity Futures MarketaThere are over 30 commodity futures and options exchanges worldwide that trade commodities ranging from energy, metals,agriculture to livestock in countries including the United States, China, Japan, Malaysia and the United Kingdom. (Source: FuturesIndustry Association (FIA), FI magazine September 2011) . The commodity exchanges trade in physical commodity products, as wellas in financial instruments. Trading is mostly done in futures and options contracts. Spot trading calls for immediate delivery of aspecified commodity and is often used to obtain the goods necessary to fulfil a seller‘s delivery obligations under futures contracts.bAccording to the FIA Report, strong levels of growth were seen in the trading volume of commodity futures and options, especiallythose relating to non-precious metals, agricultural, energy and precious metals commodities.
  • 10. cRecent times have seen a distinct shift futures and options trading from non-precious metals and agri commodities, to preciousmetals and energy. The trading volume of futures and options contracts of precious metals rose by 49.8% to 127.49mn contracts forthe six months ended June 30, 2011 y-o-y, and that of futures and options contracts of energy products rose by 16.0% to 416.24mncontracts for the same period. The trading volume of futures and options contracts of non-precious metals decreased by 37.7% to190.37mn, while that of agricultural commodities decreased by 9.1% to 529.59mn contracts during the same period.Metals FuturesMetal futures contracts include a wide variety of metal commodities, classified into precious metals (incl. gold, silver and platinum)and non-precious metals (incl. lead, aluminium, copper and zinc). Gold is the most popular precious metal in metal futures contractstrading. Trading in gold futures provides individual investors with an easy and convenient alternative to the traditional means ofinvesting in gold, such as bullion, coins, and mining stocks. In addition, a broad cross-section of companies in the gold industry, frommining companies to fabricators of finished products, can use gold futures contracts to hedge their price risk.Energy FuturesEnergy futures contracts include energy commodities such as crude oil, natural gas, heating oil, gasoline and coal. Over the pastseveral years, the markets for energy commodities trading have been characterised by rapid growth and high liquidity, which can beattributed to:· increased market acceptance of the value of commodity futures as risk management tools,· greater access to futures markets through technological innovation,· increased price fluctuation in crude oil and natural gas,· increased demand for commodities as a distinct asset class for portfolio diversification,· increased participation in energy markets by financial institutions, such as banks and hedge funds,· increased awareness of the ability to obtain or hedge market exposure through the use of futures and options contracts,· changes in the regulatory environment of energy markets around the world, specifically electricity and natural gas.
  • 11. Caps on Foreign Investments in the Commodity Exchanges Sector in IndiaForeign investment is permitted in commodity exchanges with the following restrictions:a) Foreign direct investment up to 49.0% is allowed under the Government route as follows:(i) Investment by registered foreign institutional investors under the Portfolio Investment Scheme will be limited to 23.0%,(ii) Investment as FDI under the FDI Scheme will be limited to 26.0%,b) Foreign institutional investors’ purchases shall be restricted to the secondary market only,c) No non-resident investor or entity, including persons acting in concert, shall hold more than 5.0% of the equity in commodityexchanges.Further, foreign direct investment (FDI) is allowed in commodity exchanges only with the prior approval of the Foreign InvestmentPromotion Board (FIPB). Furthermore, transfer of shares between non-residents and residents are freely permitted, subject tocertain restrictions.Other Commodity Exchanges in IndiaCurrently there are 21 commodity exchanges and associations in India, which are recognised by the Government of India andauthorised to organise and regulate futures trading in various commodities.Of these exchanges, 16 are regional or localised exchanges, which are spread across India. Most of these regional exchanges practicethe open-outcry system. Some of these regional exchanges trade in just a few commodities.The five national multi-commodity exchanges, namely MCX, NCDEX, NMCE, ICEX and ACE offer electronic trading in numerouscommodity futures contracts. Four of these exchanges, viz., MCX, NCDEX, NMCE and ICEX, accounted for 98.8% of the turnover ofcommodity futures contracts traded in India during FY10. These five national multi-commodity exchanges (including ACE, whichwas started in October 2010) accounted for 99.4% and 99.7% of the turnover of commodity futures contracts traded in India forFY11 and the nine months ended December 31, 2011, respectively.National Commodity and Derivatives Exchange Ltd. (NCDEX)NCDEX commenced operations in December 2003. According to FMC data, 34 and 29 commodities were traded on NCDEX for FY11and 9 months ended Dec. 31, 2011, respectively.National Multi Commodity Exchange of India Ltd. (NMCE)NMCE was India‘s first demutualised national multi-commodity exchange, having commenced futures trading in November 2002.According to FMC data, 24 and 26 commodities were traded on NMCE for FY11 and 9 months ended Dec. 31, 2011, respectively.
  • 12. Indian Commodity Exchange Ltd. (ICEX)ICEX received FMC approval to begin operations as a national bourse in October 2009. ICEX commenced trading operations inNovember, 2009. According to FMC data, 14 and 13 commodities were traded on ICEX for FY11 and 9 months ended Dec. 31, 2011,respectively.ACE Derivatives & Commodity Exchange Ltd. (ACE)Ace Derivatives and Commodity Exchange, which transformed from a regional exchange to a national multi-commodities futurestrading platform, was launched in October, 2010. Six and eight commodities were traded on ACE for FY11 and 9 months ended Dec.31, 2011, respectively.Industry Growth in IndiaCommodity futures trading in India has grown multi-fold since the Government of India permitted futures trading in commodities inApril, 2003. The total value of commodities futures traded in India in FY11 was `119,489bn, up ~90x the value of commodityfutures contracts traded in FY04, which was `1,294bn. Commodity futures trading volumes have risen at a CAGR of 90.9% betweenFY04 and FY11.There are currently over 60 commodities futures that have been approved by the FMC for trading during the calendar year 2011with gold, silver, crude oil, copper, zinc, nickel and natural gas comprising the majority of the trading turnover.Growth Drivers for the Industry Economic growth Government of India initiatives to modernize commodity futures markets Introduction of new commodity classes, particularly intangibles such as freight, rainfall and commodity indices Increased investor participation Technological advancements Introduction of Options: Options trading volumes in the global derivatives markets constituted around 50.8% of the totalfutures and options volumes traded for the six months ended June 30, 2011. If trading in commodity options are permitted by theGovernment, it may lead to increased volumes and overall growth in the Indian commodity derivatives market.Certain types of investors precluded from commodities trading; options too prohibitedUnder the current regulations in India, foreign institutional investors (FIIs), banks and mutual funds cannot trade on commodityexchanges. Also, trading in commodities options is prohibited.While this remains a concern from the point of view of existing investors, we believe this can in fact be a driver of the stock’svaluation going forward, in case the authorities permit these investor classes to trade on commodity exchanges and also permittrading in commodity options.
  • 13. Multi Commodity Exchange of India Ltd.Comparison of Volumes on MCX and NSEMonth Year(`Bn) (USDBn) (`Bn) (USDBn)Jan 2010 5,627 114 3,384 69Feb 2010 6,170 125 2,451 50Mar 2010 6,279 128 2,862 58Apr 2010 6,035 123 2,766 56May 2010 7,036 143 2,846 58Jun 2010 7,536 153 2,861 58Jul 2010 7,528 153 2,786 57Aug 2010 7,580 154 3,120 63Sep 2010 7,628 155 3,299 67Oct 2010 8,477 172 3,605 73Nov 2010 9,059 184 3,640 74Dec 2010 8,015 163 2,957 60Jan 2011 9,198 187 2,673 54Feb 2011 9,121 185 2,665 54Mar 2011 11,203 228 2,557 52Apr 2011 11,614 236 2,283 46May 2011 11,481 233 2,339 48Jun 2011 10,487 213 2,225 45Jul 2011 12,453 253 2,300 47Aug 2011 17,674 359 2,353 48Sep 2011 17,682 359 2,353 48Oct 2011 12,018 244 1,933 39Nov 2011 13,992 284 2,063 42Dec 2011 12,405 252 1,889 38Jan 2012 12,209 248 2,369 48Commodity Futures Volumes Cash Equities VolumesMCX NSE
  • 14. 2575125175225275325375Jan-10Mar-10May-10Jul-10Sep-10Nov-10Jan-11Mar-11May-11Jul-11Sep-11Nov-11Jan-12Trading Volumes: MCX v/s NSEMCX (USD bn) NSE (USD bn)
  • 15. Multi Commodity Exchange of India Ltd.Analyst’s NoteCompany BackgroundBusiness Model OverviewMCX is the leading commodities exchange in India, based on value of commodity futures contracts traded.Peculiarities of Business ModelConcentration of four commoditiesTurnover of commodity futures contracts traded on MCX (by value) has beenconcentrated in silver, gold, crude oil and copper, as per following table.FY11 9 mths toDec.11Silver 27.4% 38.2%Gold 25.1% 27.5%Crude Oil 17.9% 15.9%Copper 11.6% 8.8%Total 82.0% 90.4%Contracts traded on the MCX (by value) grew at CAGR of 52.3% during FY07-11, from `2,729,821Cr in FY07, to`14,932,852Cr in FY11. Recent growth in the value of contracts traded on the MCX is largely attributable to growth in thetrading volume of key commodities traded on MCX such as gold, silver, base metals and crude oil, the introduction of newcommodity futures contracts, increased liquidity in the commodities market and the expansion of MCX’s market as also theresulting increase in its membership base.This research note attempts to capture the essence of the business model of MCX and some of the investment positives andconcerns. Investors are advised to refer the red herring for the IPO, for a better understanding of the company, its business modeland risk factors.MCEIL was incorporated in April, 2002 as a private limited company. FTIL acquired the shareholding of the erstwhile promotersin August, 2003. MCX commenced online futures trading in November 2003.Any significant decline in the prices of gold, crude oil and silver may therefore impact the futures turnover volumes ofthese commodities on the MCX, impacting its financial performance in turn.
  • 16. MCX’s trading volumes may be affected primarily by: development of new commodity futures contracts on competing exchanges volatility in commodity prices availability of more electronic trading platforms possible regulatory changes negative publicity and regulatory investigationsSubsidiary / Associate CompaniesCountry of Proportion of Ownership Interestincorporation (as at Dec-31-2011)Multi Commodity Exchange India 100%Clearing Corporation Ltd. (MCX CCL) India 100%SME Exchange of India Ltd. (SME) India 51%MCX-SX Clearing Corporation Ltd. (MCX SXCCL) India 26%Dubai Gold and Commodities Exchange DMCC (DGCX) U.A.E. 5%MCX Stock Exchange Ltd. (MCX-SX) India 5%Global Rankings2011 2011(Jan - June)Volume (mncontracts)(Jan - June)Change y-o-y(%)CME Group (includes CBOT & NYMEX) 2 1 352.96 18.1Zhengzhou Commodity Exchange 11 2 217.58 -0.4ICE Group (incl. U.S., U.K. and Canadian Markets) 12 3 159.09 18.4Shanghai Futures Exchange 14 4 128.54 -57.2Multi Commodity Exchange of India 9 5 127.77 41.5Name of Subsidiary / Associate Co.RankingsamongDerivativesExchanges (Jan -CommodityFuturesRankings Jan -June 2011Name of Commodity Futures ExchangeWe note that the MCX compares well with global derivatives exchanges, in terms of volumes of commodity futures contracts. It was ranked9thamong global derivatives exchanges and 5thamong global commodity futures exchanges.We believe gold and silver, in particular, have seen an unprecedented run-up in prices in the last two years. Any correctionin these therefore, may likely impact MCX’s volumes.
  • 17. Multi Commodity Exchange of India Ltd. `: Indian Rupee Crore = 10 millionIPO Details 49.232 per USDNo. of SharesPrice pershare (`)Amt. (`Cr)IPO size 10,000,000New shares 0 0.00 * Assuming pricing at cap price of ` 1032/shareShares being sold by selling shareholders * 6,427,378 1032 663.316,427,378 663.31 134.73 552.8 112.28Diluted Equity (no. of shares) At Cap price At Floor pricePre-IPO 50,998,369 50,998,369IPO new shares 0 0 -> dilutionTotal No. of Shares post-IPO 50,998,369 50,998,369No. of Shares (Cr) 5.100 5.100IPO Price ` 1032 1032 1032 860Market Cap (`Cr) 5263 4386Market Cap ($mn) 1069 891Earnings Estimates and Valuations (`Cr)Particulars FY10 FY11 FY12E FY13ERevenues 287.38 368.89 538.81 702.25EBITDA 141.56 191.76 342.83 429.07PAT 220.81 176.27 283.10 345.17Pd up Equity 40.80 51.00 51.00 51.00EPS (`) 54.12 34.56 55.51 67.68P/e (x) 19.1 29.9 18.6 15.2Book value (`) 170.79 166.44 218.35 277.90P/b (x) 6.0 6.2 4.7 3.1Price / Sales (x) 14.3 9.77 6.25
  • 18. Multi Commodity Exchange of India Ltd.Shareholding PatternShareholder CategoriesNo. of Shares % Holding No. of Shares % HoldingPromoters (Financial Technologies Ltd.) 15,903,491 31.2% 13,259,575 26.0%Institutions 16,744,784 32.8% 12,961,322 25.4%Others 16,491,131 32.3% 16,491,131 32.3%Anchor Investors (excl. Domestic MFs) 0 0.0% 617,738 1.2%QIBs excl. Mutual Funds 0 0.0% 2,053,978 4.0%Mutual Funds (incl. Domestic MFs) 0 0.0% 416,973 0.8%Non-Institutional Investors 0 0.0% 926,607 1.8%Employees 0 0.0% 250,000 0.5%Public (Individuals) 1,858,963 3.6% 4,021,045 7.9%Total 50,998,369 100.0% 50,998,369 100.0%12.6% Free Float 37,738,794Issue size 6,427,378 Shares `Cr 663.31Issue Breakup No. of Shares Value $mnIssue size 6,427,378Reservation for:Employees 250,000 3.9% 5.2Net IPO 6,177,378 96.1% 129.5QIBs 3,088,689 48.1% 64.7- Anchor Investors 926,607 14.4% 19.4 30.0%- QIBs excl. MFs 2,053,978 32.0% 43.1 66.5%- MFs 108,104 1.7% 2.3 3.5%Non-Institutional Investors 926,607 14.4% 19.4Retail Investors 2,162,082 33.6% 45.3Total 6,427,378 100.0% 134.7Breakup of Anchor Investor portion 926,607- Domestic MFs 308,869 1/3 √- Non-MF 617,738 2/3 √Shares sold by Selling ShareholdersFinancial Technologies 2,643,916 15,903,491 13,259,575SBI 2,112,025 2,640,031 528,006GLG Financials 781,508 976,885 195,377Alexandra Mauritius 390,754 488,442 97,688Corporation Bank 246,175 1,775,000 1,528,825ICICI Lombard 148,000 185,000 37,000Bank of Baroda 105,000 525,000 420,000TOTAL (excl. FT) 3,783,462 6,590,358 2,806,896Pre-Issue Post-Issue
  • 19. 10000000No. of Shares 50,998,369 $= 49.232 `Cap Price per share 1032`Cr 5263$mn 1069 1.07Free float Mcap 3895Free float Mcap $mn 791No. of Shares 50,998,369Floor Price per share 860`Cr 4386Free float Mcap 3,246Post-Issue Market Cap
  • 20. Multi Commodity Exchange of India Ltd.Legend: Cr = 10 MillionExchange Rate: USD 1 = INR (`) 49.23Key Assumptions FY12E FY13ERevenue Growth 46.1% 30.3%Staff costs / Sales 5.1% 5.3%Administration and other operating expenses / Sales 31.2% 33.6%Total Expenditure / Sales 36.4% 38.9%EBITDA margin 63.6% 61.1%Other Income / Sales 17.2% 14.2%Other Income / PBT 22.7% 20.2%Depreciation / Average Net Block 14.2% 17.5%Tax / PBT 30.0% 30.0%PAT / Sales 52.5% 49.2%Rate of Dividend 50% 70%Dividend Payout ratio 10.5% 12.0%Debt-equity Ratio (x) 0.00 0.00Current Ratio (x) 0.68 1.00Receivables Collection period days 43 40Fixed Assets turn (x) 1.7 2.1RoE 24.3% 23.5%RoCE 27.9% 27.5%
  • 21. Multi Commodity Exchange of India Ltd.Earnings Estimates (`Cr)Particulars FY12E FY13ETotal Revenues (excl. other income) 538.81 702.25EBITDA 342.83 429.07Profit before Depreciation & Taxation 435.47 529.12Depreciation 27.44 33.44Profit Before Taxation 408.03 495.68Total Tax 122.41 141.7Profit After Taxation 283.1 345.17EPS (`) 55.51 67.68CEPS (`) 60.89 74.24Book-value (`) 218.35 277.9EBITDA margin 63.6% 61.1%RoE 24.3% 23.5%RoCE 27.9% 27.5%Source: Nitin Khandkar Institutional Research
  • 22. Multi Commodity Exchange of India Ltd.(`Cr)Consolidated P&L Statements for period ending, 31-3-2009 31-3-2010 31-3-2011 31-12-2011 31-3-2012 31-3-2013IncomeTransaction fees 186.10 264.08 349.54 386.82 518.34 673.84Membership Admission fees 10.52 6.96 3.51 4.14 5.14 7.70Annual subscription fees 13.59 13.62 13.47 9.88 13.34 18.01Terminal charges 2.24 2.72 2.36 1.50 2.00 2.70Income from Operations 212.45 287.38 368.89 402.33 538.81 702.25Growth 35.3% 28.4% 46.1% 30.3%ExpenditureStaff costs 25.43 21.75 26.43 20.14 27.65 37.52Administration and other operating expenses 110.61 124.08 150.70 121.68 168.33 235.66Total Expenditure 136.04 145.83 177.13 141.82 195.98 273.18EBITDA 76.41 141.56 191.76 260.52 342.83 429.07Other Income 153.40 206.32 78.67 72.17 92.64 100.05Interest 0.18 0.04 0.02 0.00 0.00 0.00Profit before Depreciation & Tax 229.62 347.83 270.41 332.68 435.47 529.12Depreciation/ Amortisation 19.96 24.74 24.66 20.44 27.44 33.44Net profit before tax 209.67 323.09 245.75 312.24 408.03 495.68Provision for tax-Current tax 45.27 100.43 70.35 91.44-Prior period tax 0.00 0.00 0.20 -2.72-Deferred tax 6.31 1.91 2.08 2.98-Wealth tax 0.03 0.03 0.02 0.02-Fringe benefit tax 0.64 0.00 0.00 0.00Total Tax 52.25 102.37 72.65 91.71 122.41 148.70Net Profit after Tax before Share of Profit ofAssociate157.42 220.73 173.10 220.53 285.62 346.97Share of Profit of Associate 0.04 0.30 0.26 0.14 0.20 0.20Net Profit after Tax 157.46 221.02 173.36 220.67 285.82 347.17Impact of prior period adjustments 1.38 -0.21 2.92 -2.72 -2.72 -2.00Net Profit, as restated 158.84 220.81 176.27 217.95 283.10 345.17Growth 39.0% -20.2% 60.6% 21.9%EPS (`) 31.44 43.29 34.56 42.74 55.51 67.68CEPS (`) 43.48 60.17 38.78 47.25 60.89 74.24Book value (`) 121.00 170.79 166.44 210.57 218.35 277.90
  • 23. Consolidated P&L Statements for period ending, 31-3-2009 31-3-2010 31-3-2011 31-12-2011 31-3-2012 31-3-2013Cap Price 1032 1032 1032 1032 1032P/e (x) 18.6 15.2P/b (x) 4.7 3.7P/s (x) 9.8 7.5Floor Price 860 860 860 860 860P/e (x) 15.5 12.7P/b (x) 3.9 3.1P/s (x) 10.2 7.8EBITDA margin 36.0% 49.3% 52.0% 64.8% 63.6% 61.1%Staff costs / Income from Operations 12.0% 7.6% 7.2% 5.0% 5.1% 5.3%Administration & other op. exps. / Income from Operations 52.1% 43.2% 40.9% 30.2% 31.2% 33.6%Total Expenditure / Income from Operations 64.0% 50.7% 48.0% 35.2% 36.4% 38.9%Other Income / Sales 72.2% 71.8% 21.3% 17.9% 17.2% 14.2%Other Income / PBT 73.2% 63.9% 32.0% 23.1% 22.7% 20.2%Depreciation / Average Net Block 12.3% 12.7% 14.2% 17.5%Tax / PBT 24.9% 31.7% 29.6% 29.4% 30.0% 30.0%PAT/ Income from Operations 74.8% 76.8% 47.8% 54.2% 52.5% 49.2%ROE 29.7% 29.9% 19.6% 19.4% 24.3% 23.5%ROCE 11.2% 16.5% 19.4% 22.0% 27.9% 27.5%Payout Ratio 15.0% 10.8% 16.8% 0.0% 10.5% 12.0%Revenue BreakupTransaction fees 87.6% 91.9% 94.8% 96.1% 96.2% 96.0%Membership Admission fees 5.0% 2.4% 1.0% 1.0% 1.0% 1.1%Annual subscription fees 6.4% 4.7% 3.7% 2.5% 2.5% 2.6%Terminal charges 1.1% 0.9% 0.6% 0.4% 0.4% 0.4%Income from Operations 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Balance brought forward from previous year, as restated 89.02 208.02 382.86 512.10Profit before appropriation, as restated 247.86 428.83 559.13 730.05Appropriations:Proposed dividend 20.40 20.40 25.50 0.00 25.50 35.70Final dividend of earlier year 0.13 0.00 0.00 0.00 0.00 0.00Corporate dividend tax 3.49 3.39 4.14 0.00 4.14 5.7916.22% 16.22% 16.22%EBIT 56.45 116.81 167.10 240.08 315.39 395.63EBIT margin 26.6% 40.6% 45.3% 59.7% 58.5% 56.3%
  • 24. Multi Commodity Exchange of India Ltd.(`Cr)Consolidated Balance Sheets as at, 31-3-2009 31-3-2010 31-3-2011 31-12-2011 2012E 2013ESources of FundsShareholders fundsPaid-up Equity Share Capital 40.80 40.80 51.00 51.00 51.00 51.00Stock Option Outstanding Account 0.02 0.00 0.00 0.00 0.00 0.00Reserves and Surplus-Securities Premium 226.47 227.04 216.84 216.84 216.84 216.84-Amount recoverable from MCX ESOP Trust -22.10 -16.53 -11.13 -4.05 0.00 0.00-Settlement Guarantee Fund 1.51 1.63 1.75 1.87 1.87 1.87-General Reserves 38.93 61.01 78.29 78.29 78.29 78.29-Balance in Profit and Loss Account 208.02 382.86 512.10 729.93 765.56 1069.24493.65 696.81 848.85 1073.88 1113.56 1417.24Minority interest 0.00 0.00 0.00 0.05 0.05 0.05Deferred tax liability (net) 8.72 10.63 12.71 15.69 15.69 20.69Total Liabilities 502.37 707.44 861.56 1089.61 1129.25 1437.93Applications of FundsFixed AssetsGross Block 259.48 267.88 291.65 309.54 314.54 339.54Less: Depreciation 50.89 75.36 96.36 116.54 122.80 148.98Net Block 208.59 192.52 195.30 193.01 191.75 190.57Capital Work-in-progress 0.27 0.27 0.05 0.04 2.00 2.00Net Fixed Assets 208.86 192.79 195.35 193.05 193.75 192.57Investments 469.82 617.02 823.74 1095.81 1145.81 1245.81Current Assets, Loans and AdvancesSundry Debtors 26.90 30.38 48.87 49.40 61.09 74.10Cash and Bank Balances 405.85 270.05 331.17 228.57 279.99 666.78Other Current Assets 9.17 7.83 11.31 9.67 12.59 7.79Loans and Advances 45.24 110.79 89.66 96.09 99.00 113.85Total Current Assets 487.17 419.06 481.01 383.73 452.67 862.53
  • 25. Consolidated Balance Sheets as at, 31-3-2009 31-3-2010 31-3-2011 31-12-2011 2012E 2013ECurrent Liabilities and ProvisionsCurrent liabilities and provisions 663.48 521.42 638.55 582.98 662.98 862.98Net Current Assets -176.31 -102.36 -157.53 -199.25 -210.31 -0.45Total Assets 502.37 707.44 861.56 1089.61 1129.25 1437.93Check 0.00 0.00 0.00 0.00 0.00 0.00Incremental Capex (`Cr) 8.40 23.56 17.89 6.96 25.00Current Ratio 0.73 0.80 0.75 0.66 0.68 1.00Fixed Assets turn (x) 0.82 1.07 1.26 1.30 1.71 2.07Receivables turnover (days) 52.75 41.99 51.03 46.62 43.01 40.14
  • 26. Multi Commodity Exchange of India Ltd.(`Cr)Cash Flow Statements for period ended 31-3-2009 31-3-2010 31-3-2011 31-12-2011 31-3-2012 31-3-2013Cash Flow from Operating ActivitiesNet profit before tax, as restated 210.91 323.09 245.75 312.24 408.03 495.68Adjustments for:Depreciation/Amortization 19.96 24.74 24.66 20.44 27.44 33.44Interest expense 0.18 0.04 0.02 0.00 0.00 0.00Dividend from investments -26.02 -14.44 -32.27 -30.87 -36.87 -40.56Diminution in value of investments 7.20 0.63 0.00 0.34 0.00 0.00Profit on sale of investments (net) -91.37 -147.26 -5.63 -8.16 -9.16 -14.16Loss on sale of assets or assets scrapped (net) 0.29 0.07 1.34 0.14 0.20 0.50Advertisement expense (service tax set off availed) 0.00 0.56 0.00 0.00 0.00 0.00Interest income -17.12 -22.05 -17.36 -14.04 -20.86 -25.03Operating profit before working capital changes 104.03 165.39 216.52 280.09 368.78 449.87Adjustments for:(Increase)/decrease in trade and other receivables -17.64 -56.60 -5.56 11.86 -12.22 -13.02(Decrease)/increase in trade payables and provisions 224.48 -145.32 113.57 -46.19 24.43 200.00Cash generated from / (used in) operations 310.86 -36.53 324.53 245.76 380.99 636.85Tax paid -25.55 -55.35 -54.57 -82.06 -122.41 -148.70Net Cash generated from / (used in) Operating Activities 285.31 -91.87 269.96 163.70 258.59 488.15Cash Flow from Investing ActivitiesAdditions to fixed assets -75.75 -9.63 -31.22 -18.74 -5.00 -25.00Deletion / Adjustment to Fixed Assets 3.38 0.90 2.66 0.46 0.50 0.50Purchase of investments -11,090.74 -9,934.56 -10,926.86 -10,544.67 -50.00 -100.00Redemption/sale of investments 11,014.53 9,942.09 10,678.41 10,369.94Dividend from investments 26.02 14.44 32.27 30.87 36.87 40.56Interest received 9.70 23.39 13.87 15.68 20.86 25.03Cash generated from / (used in) investing activities -112.86 36.62 -230.86 -146.46 3.23 -58.91Tax Paid -24.22 -48.90 -1.77 -0.87 -1.00 -1.00Net Cash generated from / (used in) Investing Activities -137.08 -12.27 -232.63 -147.33 2.23 -59.91
  • 27. Cash Flow Statements for period ended 31-3-2009 31-3-2010 31-3-2011 31-12-2011 31-3-2012 31-3-2013Cash Flow from Financing ActivitiesProceeds from:-Equity share capital 1.56 0.00 0.00 0.00 0.00 0.00-Securities premium 21.26 0.01 0.00 0.00 0.00 0.00-Minority Shareholders of Subsidiary Company 0.00 0.00 0.00 0.05 0.05 0.05Share issue exps adj. in Securities Premium Account -6.30 0.00 0.00 0.00 0.00 0.00Dividend paid (including tax thereon) -4.74 -23.86 -23.79 -29.64 -29.64 -41.49Interest paid -0.18 0.00 -0.02 0.00 0.00 0.00Net Cash generated from / (used in) Financing Activities 11.59 -23.85 -23.81 -29.59 -29.59 -41.45Net cash (outflow) / inflow during the year 159.82 -128.00 13.52 -13.22 231.22 386.79Cash and cash equivalents (opening balance) 16.65 176.47 48.47 61.99 48.77 279.99Cash and cash equivalents (closing balance) 176.47 48.47 61.99 48.77 279.99 666.78Net Increase/ (Decrease) in Cash and Cash Equivalents 159.82 -128.00 13.52 -13.22 231.22 386.79
  • 28. Multi Commodity Exchange of India Ltd.DCF Workings (`Cr)FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21ERevenues 287.38 368.89 538.81 702.25 877.81 1053.37 1264.04 1453.65 1671.70 1838.87 2022.76 2225.03 2447.53Growth 28.4% 46.1% 30.3% 25.0% 20.0% 20.0% 15.0% 15.0% 10.0% 10.0% 10.0% 10.0%EBIT 116.81 167.10 315.39 395.63 438.90 526.69 568.82 654.14 752.26 735.55 809.10 890.01 979.01EBIT Margin 40.6% 45.3% 58.5% 56.3% 50.0% 50.0% 45.0% 45.0% 45.0% 40.0% 40.0% 40.0% 40.0%Depreciation 24.74 24.66 27.44 33.44 36.11 39.00 42.12 45.49 49.13 53.06 57.31 61.89 66.84Fixed Assets Investment -9.63 -31.22 -5.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00 -25.00NWC Change -201.91 108.01 12.21 186.98 196.33 206.15 216.45 227.28 238.64 250.57 263.10 276.26 290.07FCFF -69.99 268.56 350.04 591.05 646.35 746.83 802.40 901.91 1015.04 1014.18 1104.51 1203.16 1310.93WACC 14.3% 14.3% 14.3% 14.3% 14.3% 14.3% 14.3% 14.3% 14.3% 14.3%Projection Year 1 2 3 4 5 6 7 8 9 10Discount Factor 0.87 0.77 0.67 0.59 0.51 0.45 0.39 0.34 0.30 0.26306.20 452.25 432.61 437.26 410.94 404.05 397.76 347.65 331.18 315.57 3037.45Intrinsic ValueSum of PV of FCFF (Explicit Forecast)3,835WACC 14.3%Terminal Growth Rate 3%PV of Terminal Cash Flow 3,037Enterprise Value (EV) 6,873Less: Total Debt 0Add: Cash & Cash Equivalent 331Intrinsic Value (`Cr) 7,204No. of Shares (Cr) 5.0998Fair Value per Share (`) 1,413Current Price (`) 1,032Under/(Over) Valued 36.9%Risk-free rate 8.2% Cost of Debt 13.0%Beta 0.9 Effective tax rate 30.0%Market rate of return 15.0%C(E) 14.3% Net Cost of Debt 9.1%W(E) 100.0% W(D) 0.0%WACC 14.3% Perpetual Growth 3.0%WeightsTotal Debt 0.00Total Shareholders Equity 1,113.56We 100.0% Wd 0.0%PV of Free Cash Flows
  • 29. Multi Commodity Exchange of India Ltd.Valuations based on cap and floor price of the IPOParticulars FY12E FY12E FY13E FY13ECap/Floor price (`) 1032 860 1032 860Consolidated PAT (`Cr) 283.10 283.10 345.17 345.17EPS (`) 55.51 55.51 67.68 67.68Book-value (`) 218.35 218.35 277.90 277.90P/e (x) 18.6 15.5 15.2 12.7P/b (x) 4.7 3.9 3.7 3.1FY12E FY13EEVMarket Cap 5263.03 5263.03Debt 0.00 0.00Cash 279.99 666.78EV 4983.04 4596.25EBITDA 342.83 429.07EV/EBITDA (x) 14.5 10.7
  • 30. Multi Commodity Exchange of India Ltd.Global Peer ComparionFigures in $bn, except asstated otherwiseCME GroupIntercontinentalExchangeNYSEEuronextNASDAQ OMXCBOEHoldingsMCXTicker CME ICE NYX NDAQ CBOE MCX 49.232Price ($) [Feb-22-2012] 290 133 29 27 27 2152-wk High / Low 317 / 225 135 / 103 42 / 22 30 / 20 30 / 22Market Cap ($bn) 19.2 9.7 7.7 4.7 2.4 1.1Sales ttm 3.28 1.33 4.18 3.44 0.51 0.08EBITDA ttm 2.28 0.91 1.25 0.88 0.28 0.05PAT ttm 1.81 0.51 0.62 0.39 0.14 0.04Diluted EPS ($) ttm 17.03 6.90 2.36 2.15 1.52 0.87Book value ($) ttm 325.93 43.10 25.53 28.43 2.66 4.28P/e ttm (x) 17.0 19.3 12.3 12.6 17.8 24.1P/b ttm (x) 0.9 3.1 1.1 0.9 10.2 4.9Sales CY12E 3.34 1.44 2.62 1.77 0.53 0.14EPS ($) CY12E 17.77 8.01 2.61 2.72 1.65 1.37P/e (x) 16.3 16.6 11.1 9.9 16.4 15.2P/s (x) 5.7 6.7 2.9 2.6 4.6 7.5EV ($bn) 20.5 9.8 9.3 9.8 2.3 1.0EV/EBITDA ttm (x) 9.0 10.8 7.4 11.1 8.4 19.3EBITDA margin ttm 69.5% 68.3% 29.9% 25.5% 54.3% 64.8%Dividend Payout ratio 21.0% - 51.0% - 28.0% 16.8%Notes: MCX financials are for the period of 9 months ended December 31, 2011; earnings not annualizedEstimates for companies other than MCX: Street consensus estimates (source: internet)* MCX estimates are for FY13E (source: Nitin Khandkar Institutional Research)Domestic Market Share Data by Trading VolumesExchangeMarket Market MarketShare (%) Share (%) Share (%)MCX 6,393,303 82.30% 9,841,503 82.40% 11,980,689 87.30%NCDEX 917,585 11.80% 1,410,602 11.80% 1,287,554 9.40%NMCE 227,902 2.90% 218,411 1.80% 120,633 0.90%ICEX 136,425 1.80% 377,730 3.20% 197,741 1.40%ACE* 5,979 0.10% 30,060 0.30% 99,128 0.70%Others 83,561 1.10% 70,637 0.60% 37,110 0.30%TOTAL 7,764,755 100.00% 11,948,942 100.00% 13,722,855 100.00%FY10 FY11 9 mths to Dec-31-11Turnover(`Cr)Turnover(`Cr)Turnover(`Cr)
  • 31. Multi Commodity Exchange of India Ltd.DisclaimerThis is an independent research report, meant for private circulation within, and use by QualifiedInstitutional Investors only. This report should not be read or used by any person other than the directrecipient. Not meant for non-institutional investors or the public at large.The report is based mainly on information publicly available, including the red herring prospectus (RHP),published financial results, annual reports, etc. Investors should refer the RHP for a complete listing of riskfactors. The analyst has not had a first-hand interaction with the management of the companies coveredherein. The analyst does not claim to have any inside information, or any information not already includedin this report, to back his opinions and estimates, if any, as may be contained in this report. This report isnot meant to be a solicitation to buy, or sell the securities named herein.The analyst does not claim accuracy of his opinions and estimates as contained in this report. Whilereasonable care has been taken to avoid errors or misstatements of facts, the analyst does not acceptresponsibility, if any are inadvertently included in this report.In any case, the analyst will not be liable for any losses, if any, arising from the use of this report.Analyst Certification / DisclosuresOpinions and estimates, if any, contained in this report are the personal opinions of the analyst, unlessstated otherwise, as of the report date. However, these may be reviewed periodically and may thereforechange materially, going forward.The analyst has no investment banking, broking or other commercial relationship with any of thecompanies covered in this report, as of the report date.The analyst does not own shares in any of the companies covered in this report, as of the report date.However, the analyst has subscribed to the IPO of the company under coverage.© All rights reserved. Content from this report may not be copied, used, reproduced or distributed, withoutthe express prior written consent of the author. This report, in whole or in part, may not be hosted on anywebsite, without express prior written consent of the author.

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