Raise target price-to-earnings on MCX to 34x, slightly above historical mean

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Published: July 31, 2020 8:47 AM

Our thesis of structural and cyclical upturn is playing out. We raise our target P/E to 34x, marginally above long-term mean.

Both product and participation are expanding well at MCX.Both product and participation are expanding well at MCX.

ADTV in July has recovered from 1Q lows and is tracking over the FY20 level. This should rise further as crude oil ADTV normalises. Initiatives like indices, new products, tie-ups and indicators such as quantity delivered are rolling well. We raise target P/E to 34x, marginally above the historical mean.

Average daily traded value (ADTV) at MCX has recovered sharply from 1Q lows and we expect this to improve further. ADTV recovered to ~ Rs 350 billion in July (month-to-date) from Rs 231 billion in F1Q21 helped by strong price action in gold and silver. We expect this to further move up as crude oil trading margin normalises from current 100%, if and when Sebi approves it — likely over the next month we assume, with MCX having enabled its platform to support negative pricing. We raise FY21e ADTV from Rs 316 billion to Rs 351 billion, implying Rs 398 billion in the rest of FY21.

We raise EPS by 3-5% across FY21-23: In FY21, we raise our other income assumptions and lower costs given good cost control. This is largely offset by our assumption of a Rs 188 million write-off of the investment in a spot trading system following non-fulfilment of conditions and a higher tax rate against prior assumption. FY22-23 EPS forecasts rise due to lower costs and tax rate. We raise EPS by 3-5% across FY21-23: In FY21, we raise our other income assumptions and lower costs given good cost control. This is largely offset by our assumption of a Rs 188 million write-off of the investment in a spot trading system following non-fulfilment of conditions and a higher tax rate versus prior assumption. FY22-23 EPS forecasts rise due to lower costs and tax rate.

Our thesis of structural and cyclical upturn is playing out. We raise our target P/E to 34x, marginally above long-term mean. Both product and participation are expanding well at MCX. Index futures are likely to be launched on August 14. There are also more products in the energy segment in the works, and MCX continues to forge new industry tie-ups, such as that with Mjunction. Mutual funds have launched schemes including commodities. Increasing retail commodity participation is one of the key action plans for most retail equity bank-backed brokers.

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