Q1FY18 marked another quarter of soft volumes post demonetisation for Multi Commodity Exchange of India (MCX) — ADTV fell 24% y-o-y/3% q-o-q to Rs 188 bn. However, better yield realisation of Rs 2.24/lakh and controlled opex supported earnings. Positively, post GST implementation, some uptick in volumes was witnessed. However, our earlier volume estimate of Rs 290 bn for FY18 seems stretched given low price volatility, Q1FY18 trend, gradual rollout of options and introduction of institutional participation in phases. We, therefore, normalise our FY18 ADTV assumption to Rs 222 bn, expecting benefits of option trading and institutional participation to be visible in FY19 instead of FY18. With volumes being a key driver of earnings growth, there is a similar cut in earnings as well. Given structural volume growth visibility, operating leverage benefits and MCX’s entrenched leadership, we assign 36x earnings multiple giving us a fair value of Rs 1,310 for the stock. Maintain Buy.
Volumes soft, green-shoots visible
MCX’s volumes continued to be soft — ADTV down >3% q-o-q to Rs 188 bn — due to slowdown in bullion following lower activity in the underlying spot market owing to impact of demonetisation and uncertainty surrounding GST implementation. However, with elimination of the latter concern, few green-shoots are visible — ADTV up to Rs 210 bn during first few days of July, with bullion ADTV rising by Rs 10 bn. This, along with gradual rollout of options, institutional participation (SEBI has given the nod to AIF-III investors, who are likely to begin trading by end of second quarter, and the regulator is expected to follow up with approvals for PMS and MF players) and shift from dabba trading post demonetisation are expected to structurally drive volumes going ahead.
Outlook and valuations: visibility improving; maintain ‘BUY’
Initial signs of operating leverage benefits were visible in Q1FY18 and benefits will be more prominent when volumes see uptick in FY19. Volumes can possibly grow upwards of 30% in FY19 with options being rolled out and institutions also being allowed to trade by FY18, leading to spurt in earnings. At CMP, the stock is trading at 30x FY19E P/E. Maintain Buy/SP with revised TP of Rs 1,310.
MCX was fraught with challenges since past couple of years with its promoter, FTIL, being declared not “fit and proper” to run the exchange post NSEL fallout leading to entire top management rejig. Moreover, imposition of CTT had an adverse impact on trading volumes, coupled with sharp fall in commodity prices. Despite such turmoils, the company emerged unscathed maintaining market leadership bearing testimony to its underlying business strength. In fact, the model has evolved much stronger with experienced management backed by strong financial partner. This further supported with structural growth levers and potential regulatory changes place MCX in a favourable position to capitalise on emerging opportunities. Volumes can possibly grow upwards of 30% in FY19 with options being rolled out and institutions (AIF, MF and PMS) also being allowed to trade by FY18, leading to spurt in earnings. Operating leverage benefit will provide >380 bps of positive delta to operating margin.
(1) Higher regulatory risks due to speculative nature of trades: (i) delay in implementation of proposed policy measures; (ii) ban on trading in certain commodities; (iii) revision in open position limits, higher margin requirement, CTT imposition etc. (2) Significant dependence on a few commodities: Top four commodities—gold, silver, crude oil and copper—accounted for more than 85% of total volumes on MCX. (3) Long term pricing pressure likely in commodities futures.