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Stock Tales - Multi Commodity Exchange - ICICI Securities

Posted On: 2020-06-28 18:03:50

MCX is the leader in commodity derivatives exchanges in India with ~94% market share in terms of value of commodity futures contracts traded in FY20. The commodity derivatives exchange facilitates nationwide online trading, clearing and settlement operations of commodities derivatives. MCX is practically sole exchange with 98.57% share in precious metals, ~99.95% share in energy and ~100% share in base metals. Indian commodity market still remains underpenetrated. Hence, it is seeing a steady rise in turnover from Rs. 62 lakh crore in FY15 to Rs. 89 lakh crore in FY20. Sebi has been undertaking measures to increase participation. MCX remains one of the primary beneficiaries given its substantial market share.

Price volatility to drive turnover; index products big boost

For MCX, transaction fees on value traded on exchange (~0.0043%) comprise significant proportion (~75%) of revenue. This transaction income is dependent on two variables - commodity price, volume traded on exchange. We expect crude price fall to be offset by heightened volatility. Approval to launch cash settled index products - ICOMDEX bullion, ICOMDEX base metal indices are seen giving substantial boost to turnover; zero charge in initial phase will lead to revenue flow later. We expect ADTO to fall ~3-5% in FY21E to Rs. 83.5 lakh crore, as emergence of Covid acted as near term deterrent. However, a gradual economic revival, continued volatility in commodity prices, addition of new clients including hedgers is seen leading to ~20% YoY growth in ADTO in FY22E to Rs. 100 lakh crore. Hence, revenues are likely to grow at 8.2% CAGR (FY20-22E) to Rs. 438 crore.

Revenue growth, operating leverage to aid margins

Employee & software expense contribute ~90-94% of overall cost; thereby accounting for major proportion. Strong operational efficiency enabled it to deliver improvement in EBIDTA margins from 31.6% in FY19 to 41.3% in FY20. Increase in turnover will lead to improvement in EBITDA margin to 46.4% in FY22E, as operating leverage kicks in. Consequently, earnings is expected revive to Rs. 245 crore in FY22E, post a dip in FY21E.

Valuation & Outlook

Increased volume driven by volatility in commodity prices led to business growth in FY19-20. Strong operational efficiency enabled improvement in EBIDTA margins from 31.6% in FY19 to 41.3% in FY20. We remain positive on turnover & earnings visibility owing to 1) market leadership with diversified commodity mix, 2) strong recovery in ADTO amid volatility in commodity prices, 3) launch of index based products & 4) participation by institutional clients. Expect ~14.6% CAGR in EBITDA over FY20-22E, driven by ~8% CAGR in revenue coupled with improvement in efficiency. RoE is expected to reduce from ~17.4% in FY20 to 13.9% in FY21E (impact on volume amid Covid) and recover to 16.4% in FY22E. Currently, MCX trades at 26x FY22E EPS. We have a BUY recommendation on the stock with a target price of Rs. 1470, valuing the stock at ~33x FY22E core earnings and adding net cash after deducting SGF.

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Shares of MULTI COMMODITY EXCHANGE OF INDIA LTD. was last trading in BSE at Rs.1236.75 as compared to the previous close of Rs. 1225.25. The total number of shares traded during the day was 55790 in over 1943 trades.

The stock hit an intraday high of Rs. 1251 and intraday low of 1230. The net turnover during the day was Rs. 68993750.

Source: Equity Bulls

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