The big hole in FTIL’s sum-of-parts valuation
2 min read 19 Nov 2013, 07:43 PM ISTInvestors are adjusting for a big hole called NSEL, for which the downside is not clear
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Financial Technologies (India) Ltd (FTIL) reported a bit of positive news for its shareholders after a long time, announcing on Tuesday that Intercontinental Exchange Group Inc. (ICE) has acquired one of its subsidiaries, Singapore Mercantile Exchange (SMX).
Of course, some investors knew a day earlier, which is evident from the surge in both volumes and prices on Monday. FTIL shares had risen by 20% on the National Stock Exchange on Monday, which should be reason enough for Securities and Exchange Board of India to investigate which investors gained the most by trading on the unpublished information. Rumours of ICE’s due diligence had surfaced well over a month ago, although the deal was confirmed only this week.
Coming back to the sale of SMX, the company has managed to get an all-cash consideration of $150 million (around ₹ 932 crore today) despite the fact that volumes on the exchange are negligent. Europe-based market structure expert, Patrick L. Young, said in a newsletter that the deal makes immense sense for ICE as it gives it a fully fledged Asian clearing house with an exchange attached, helping it expand its global footprint.
It’s easy to see why news of the sale consideration excited FTIL investors. Its entire market capitalization was less than ₹ 700 crore at the end of last week, before news of the sale hit the markets. In addition, the company had a net cash position of around ₹ 700 crore as of March. After subsidiary company National Spot Exchange Ltd’s (NSEL’s) crisis erupted, it was offered a loan of ₹ 177 crore by the parent company to make payments to small investors.
Even after adjusting for this, FTIL should be sitting on cash worth close to ₹ 1,500 crore after the ICE sale, while its market capitalization has risen to only around ₹ 850 crore. In addition, it has valuable stakes in Multi Commodity Exchange of India Ltd and Dubai Gold and Commodities Exchange, apart from its own technology solutions business.
What gives? In its heyday, FTIL shares were valued as the sum of the various parts of its business. Now, investors are adjusting for a big hole called NSEL, for which the downside is not clear.
One concern among investors is the fact that the company’s statutory auditor said the company’s annual accounts for 2012-13 cannot be relied upon, after NSEL’s auditor raised red flags. Investors also fear that until the NSEL issue is fully resolved, the final impact on FTIL’s financials will not be known.
Besides, to a large extent, FTIL works among the same set of customers for its technology solutions business as it does for its exchange business. As a result, the worry among investors is that trading firms might shift business to other technology solutions firms.
In sum, while the SMX sale comes as a welcome relief for the company, the gains from the sale are hardly reflected in the company’s valuation because of continuing worries about the NSEL fiasco and the increased scrutiny on the group’s affairs.
