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Maintain ADD on Multi Commodity Exchange - Speedy recovery - HDFC Securities

Posted On: 2020-06-02 16:58:11


Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

Multi Commodity Exchange (Q4FY20 Results Review): Speedy recovery. Maintain ADD

MCX delivered healthy volume growth in 4Q (+35.7% YoY) and expanded market share by 240bps to 94% in FY20. After strong 4Q, volume dropped significantly in April-20, due to reduction in exchange timings and a sharp drop in crude prices (Covid-19). Volume recovery was witnessed in May-20, but it's still 35% below the 4Q level. Crude (45.4% of vol. in FY20) is impacted due to the high margin requirement (100%), extreme volatility, and negative settlement price. We don't see crude volume reaching the previous level in FY21E. Tailwinds like launch of Index futures and Institutional participation will aid volume recovery. Revenue est. for FY21/22E is lowered by 10.0/3.8% to factor in Covid-19 impact. We assign 30x to FY22E core PAT and add net cash (ex SGF) to arrive at a TP of Rs 1,330. Maintain ADD.

MCX revenue was up 17.9/33.0% QoQ/YoY to Rs 1.05bn (vs. exp. of Rs 1.07bn). Traded volume was up 20.5/40.0% QoQ/YoY to Rs 24.17tn. ADTV was up 18.7/35.7% QoQ/YoY to Rs 366.26bn. The surge of ADTV in 4Q was led by volume traction in Bullion (+38.9% QoQ) and Energy (+11.2% QoQ). Bullion/Energy ADTV was up 91.1/54.4% YoY in FY20. Metals ADTV was flat QoQ and down 43.3% YoY due to the physical settlement.

MCX increased its market share to 95.6% (vs. 94.4% QoQ) despite high competition. It's difficult to shift volume from existing exchange based on pricing. Depth, liquidity and impact cost are the most critical factors.

EBITDA margin stood at 38.7%, down 525bps QoQ due to high employee and other expenses (+19.8/+90.1% QoQ). Adjusted for one-off (SGF, CSR and Legal expenses) margin stood at 46.3% (in-line with est. of 46.6%). For FY20, EBITDA margin was up 1,008bps to 41.4% driven by non-linearity.

Net cash (ex SGF) increased to Rs 19.78bn (~30% of Mcap) vs. Rs 13.94bn in FY19 due to higher margin paid by members. Cash generation also improved, FCF/PAT is at 182% in FY20 vs. 136% in FY19.

Valuation and view. Institutional volume uptick is possible with Deutsche, Orbis and Stock holding signing up as custodians. Index futures launch is expected in the near-term, subject to regulatory approval. Globally Institutions account for ~50% of the total derivatives volume. MCX's focus on improving the physical delivery mechanism and local price discovery for key commodities will create a franchise for long term sustainable growth. We estimate revenue/EBITDA/Core PAT CAGR of 10/18/15% over FY20-22E. The stock trades at P/E of 34.5/26.8 FY21/22E EPS, which leaves limited upside on the table.

Shares of MULTI COMMODITY EXCHANGE OF INDIA LTD. was last trading in BSE at Rs.1294.2 as compared to the previous close of Rs. 1301.55. The total number of shares traded during the day was 22390 in over 1597 trades.

The stock hit an intraday high of Rs. 1341 and intraday low of 1282.55. The net turnover during the day was Rs. 29341969.


Source: Equity Bulls

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