>FINANCIAL TECHNOLOGIES (MOTILAL OSWAL)

Financial Technologies (FT) operates the largest commodity (MCX) and currency exchange (MCX-SX) in India. The company has evolved from a technology provider for exchanges to an incubator of exchanges and provider of related services such as clearing, warehousing, collateral management, risk management and data needs of users through “ecosystem” ventures. Its in-house technology enables it to set up exchanges at a cost and time-to-market advantage compared with international exchanges. The company's current portfolio includes ten exchanges and six ecosystems across Asia and Africa, trading in assets such as commodities, currencies, energy and equity.

MCX, MCX-SX key value drivers: With initial investments of US$10m-50m, the company has incubated exchange successes across commodity (MCX) and currency (MCX-SX), which have [1] market leadership with market shares of 83% and 51% respectively, [2] monetization at entity valuations of about US$1b, and [3] provided the venture capital to incubate four new exchanges. We expect MCX and MCX-SX to contribute 41% to our target price for FT. The success of its new exchanges could provide upsides to our estimates.

Play on non-linearity across ventures: FT is a play on operating leverage with increased sales coming with increasing margins across all its ventures. Over FY09-12, we expect [1] EBITDA CAGR of 30% (v/s revenue CAGR of 12%) in the technology business, [2] EBITDA CAGR of 56% (v/s revenue CAGR of 33%) in MCX, [3]
PAT CAGR of 40% (v/s revenue CAGR of 24.5%) in NBHC.

Technology business – fuel for the fire: Brokerage solutions/ exchange solutions for setting up exchanges fuel FT’s ventures across asset categories. In brokerage solutions, the company has a leadership position with over 80% market share in India, with more than 480,000 active licenses of its flagship product ODIN and presence at even competing exchanges like NSE, BSE, NMCE and NCDEX. We expect the technology business to contribute 34% of its target price and expect it to continue to be the key differentiator in reducing time to market and capturing downstream revenue.

Initiate coverage with a Buy, target price of Rs1,822: We value the stock based on the SOTP valuation, valuing [1] core business at 13x FY12 earnings in line with mid-cap IT valuations, [2] MCX at 18x FY12 earnings, [3] MCX-SX at 1.1x strategic sales valuation, [4] NBHC at 13x FY12 earnings, and [5] other investments at 1.5x invested capital. We initiate coverage with a Buy and a target price of Rs1,822.

To read the full report: FINANCIAL TECHNOLOGIES