Google Search

08 March 2009

CORPORATE GOVERNANCE IN THE INVESTMENT WORLD

Last year a very popular business TV channel awarded the Golden Peacock Award for Corporate Governance to Mr Raju of Satyam infamy. Very lately we also have the spectacle of the print and net based media going ga-ga over Nirmal Kotecha and his meteoric rise. Fortunately his unethical and illegal means now stand exposed. He was assisted in his misadventure by a senior journalist of a leading pink paper. Within the larger question of ethics, it also raises the issue of the standard of corporate governance and standard of journalism in India. It seems, how much ever we denigrate the western world for its culture of corporate greed and manipulation by media, we are no better or worse than them. 

And how does it affect you as an investor? Well in my view it raises the Cost of Equity. Simply put, lower standards of corporate governance implies higher risk entailed by the equity investor and hence a higher cost of equity. A sort of paying a higher insurance premium when sailing in troubled somalian waters to cover for the enhanced risk.

All in all, a clear negative for the stock market. The only positive takeway from these sordid affairs is the strength displayed by the Indian regulator and the systems put in place. Hopefully this will deter more such mis-adventurous finaglers. About the dishonesty in journalism, one can only pray that the power of media is wielded by more sincere and trustworthy hands.

THE BEST OF TWO WORLDS : FINANCIAL TECHNOLOGIES LTD

I confess I always had a fondness for this company - pleasurable mix of finance and technology, not just in name but in deeds too. This company operates with the vision of 'bringing markets to masses' and has succeeded in doing so too. 

BUSINESS
Financial Technologies (FT) is in the business of establishing an electronic equivalent of the trade route - it brings together the participants of the modern world markets in real time. This, it achieves through three lines of operations  :-
(a) Exchanges.
(b) Technology solutions.
(c) Financial Ecosystems.

Exchanges.  FT has its fingers in 8 fully baked exchange pies, with stakes ranging from 31 to 100% across India, Middle East, Singapore and Africa, dealing with spot and derivative trading in commodities, currencies, energy and carbon credit. The details are given in the table below.

There are three revenue streams for the exchanges business    :-
(a) Transaction fee - Based on charges per transaction and hence a direct correlation with the revenue of the exchange.
(b) Membership fee - This is a one time charge for and hence not a major contributor.
(c) Data Distribution - A recurring charge on the amount of data provided to the client.

Just to put things into perspective; MCX  which has a 77% market share clocks Rs 10,000 Cr per day which is more than the daily turnover of the BSE. DGCX does an easy Rs 1,000 Cr per day. Growth would come from increase in trading volumes, increase in the number of members and the inorganic growth of the exchanges.

Technology Solutions. The company provides three different types of solutions :-

(a) Exchange Solution. These include Price/Volume propositions for integrated turnkey solutions and Clearing and Settlement Solution.
(b) Brokerage Solution. It includes the near monopoly ODIN (90% share), Direct Market Access, MATCH multi-user, multi exchange and others straight through processing solutions, which are mission critical for stock exchange operations.
(c) Network Solution. A fully managed private network.

The tech solution business gets its revenues from the licences it gives out, the consulting and maintenance fee it charges and the charges for the messaging service provided. As these solutions provide for a wide range of market participants in the financial services business, to include brokerages, asset management companies, exchanges and banks, the revenue stream is a direct function of the range and depth of financial market activity.

Financial Ecosystems. This line of operation aims to augment the exchange business by attempting to capture the upstream and downstream transactions centered around the exchanges. These include:-
(a) NBHC. National Bulk Housing Corporation provides end to end 
commodity management and warehousing solutions.
(b) Atom Technologies develops tech for the retail payment processing 
systems.
(c) Riskkraft provides BFSI(Banking, financial services & insurance) domain
 consulting services.
(d) Tickerplant provides real time financial information.
(e) FTKMC is the knowledge center for the FT Group.

FINANCIALS
FT has always had a strong balance sheet. With a Debt Equity ratio at about .27 and a 
Compound Leverage Factor of 1.26, it is well poised to ride through the current storm.
Though year-on-year figures are not strictly comparable as FT sold a stake in MCX and 
received an extraordinary income of Rs 1209 Cr, a sales growth of 35 % and a very high 
Return on Equity of 65.42% ensures that the interest of the investor is well protected.

RATIONALE FOR INVESTMENT
FT has a unique business model. It is indeed difficult to take a call on the stock by the 
standard valuation metrics. So lets mind the Pounds - the pennies would take care of 
themselves.

MCX is the crown jewel of FT. Fidelity and Citigroup have a 9.21 and 5 % stake 
respectively in the exchange. Half of Fidelity's stake was bought at Rs 600 per share.
Citigroup got it dearer at Rs 1050. So using the conservative benchmark of the two, 
MCX may be valued at Rs 4690 Cr. (Fidelity as an FII cannot hold more than 5% now 
so it may have to divest 4.2%).

FT has reserves of Rs 1492 Cr and a Market Cap of Rs 2615 Cr at CMP Rs 570. So the 
complete business including MCX is available for Rs 1123 Cr! Now that's undervaluation!!

A multi-bagger? In-deed!

DISCLAIMER

This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.