Financial Tech a good buy, target Rs 1,370
We recommend a ‘buy’ rating on Financial Technologies as the company is a unique player on end-to-end presence in the ecosystem of stock exchanges. We set a target price of R1,370, implying a 27% upside potential.
Our target price for Financial Tech is the summation of the ‘base value’ (standalone technology and MCX), ‘base option value’ of other key entities (MCX-SX, Indian Energy Exchange (IEX), Singapore Mercantile Exchange (SMX) and National Spot Exchange (NSEL), and book value of other investments.
We apply a holding company discount of 20% to the entities where Financial Tech holds a majority stake and/or will go ahead and unlock value through sale of stake in the future.
The valuation multiples we apply to Financial Tech ‘option value’ bearing entities is on a low base of profit, with a huge opportunity to scale. Therefore, our current target price for the company is the ‘base option value’. We see a significant upside potential to this number as each of the entities considered scale up to become larger profit generating units. Based on the summation of individual units, we arrive at a value of R1,572 per share.
Three potential triggers in the near term could drive higher valuations: Clearance of the FCRA Bill — which allows trading of new products like options, indices on MCX, driving volumes and valuation for MCX and, consequently, Financial Tech stake sale in IEX (from 33% to 26%) — which would help value unlocking in the same and volumes performance at MCX-SX post launch on February 9, the valuation of which will get embedded in Financial Tech price.
The company enjoys strong economic moat. Financial Tech businesses lend a healthy competitive advantage and sustainable profitability. Leading market share of multiple Financial Tech exchanges and proven technology credence substantiate its capability of long-term sustenance of its ventures. Forward integration from trading platform to exchanges to complementary ecosystem ventures facilitates a distinctive value proposition to customers.
In our view, MCX has cornered a monopolistic market share in commodity exchanges. Supply of technology platform by its parent, Financial Tech, gives MCX a competitive edge.
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