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Brokerage’s take on the Multi Commodity Exchange scrip:

– The company enjoys a monopoly in the commodity exchange business with 92.6% market share as on Q1FY22.

– Headwinds owing to covid disruption, crude impact, subdued gold price trend as well as SEBI’s new margin rules.

Brokerage sees improvement going ahead in the near term as worst with respect to volume growth is behind us. Volume is expected to pick up with increase in algo trading, pick-up in crude volume (reduction in margin) and implementation of cross margin benefits.

” Permission to DIIs to participate in commodity markets was one of the significant measures. Approval of Index derivatives will aid the growth of Institutional participation which in turn could bring large volumes on the exchange. Recent traction in option volumes is noteworthy; the company will start charging for options contracts effective Oct-21. The shift to the new trading platform will result in cost savings, leading to approximately 260bps margin tailwind in FY23E”, says the brokerage report.

Valuation & Recommendation:

The brokerage expects the company to post 25.7% EBITDA CAGR, driven by revenue CAGR of 14% over FY21-23E. Net profit is seen to grow by 16.3% CAGR over same time frame. EBITDA margin is estimated to reach to 57.6% in FY23E vs 47.4% in FY21. Volume shall see an expansion or recovery from here on on the back of higher volatility in Gold and Crude oil prices.

Further given the asset-light nature of the business, brokerage expects RoE to recover to 20.3% in FY23E vs 16.2% in FY21. Also, there are anticipations around likely re-rating of the MCX stock given the company’s free cash flow, balance sheet-light business with a 90% dividend payout.

“A high quality monopoly exchange with high structural growth and cyclical resilience deserve higher multiples. MCX currently trades at 38.3x FY22E and 28x FY23E EPS. We believe that investors can buy MCX at LTP of Rs. 1672(31.5xCore EPS + Cash) and add more at Rs.1504 (27.5xCore EPS + Cash) for the base case fair value of Rs.1825 (35xCore EPS + Cash) and for the bull case fair value of Rs.1953 (38xCore EPS + Cash) over the next two quarters”, adds the brokerage.

Q1FY22 results:

On a quarterly basis revenue saw a dip by 10 percent to Rs. 876 million, while it rose 20 percent YoY. EBITDA margin stood at 42.1%, down 358bps QoQ, on account of lower revenue and higher employee expenses. Net profit also recorded a decline of 30 percent YoY to Rs. 398 million. The company has planned to use Rs.120 mn MAT credit of FY21 in FY22 and it should converge to normal tax rates from FY23E onwards.

Notably option volume has shown resilience led by crude oil, which has contributed about 70% to total options volume in FY22 so far. Note that September is the fourth and the last stage of the new SEBI margining rules being implemented.

Risks & Concerns:

– Any adverse change in regulations could hurt the business in major way

– High competition from other exchanges, especially after permitting of trading of commodity derivatives on NSE/BSE.

– Cybersecurity threat is becoming more and more critical with technological advancements. Measures to tackle competition and changes in latest technology are important in this business. MCX is also developing new software with TCS.

– The possibility of third wave and fresh lock downs could hurt the business as volumes are closely linked with economic conditions both the domestic and the global.

– As the Exchange’s transaction fee is calculated on the basis of the value of commodity futures contracts traded on the Exchange, the• volume and value of contracts traded on it have a direct impact on MCX’s revenues. Falling prices of base metals and bullion could impact its revenues adversely.

– This business has inherent risk of volatility. Market volatility (especially downward) has high correlation with volumes growth. So any• prolonged period of negative returns from commodities market can hurt company’s revenues hard.

– MCX may have to take an Rs18.8 cr write-off of the investment in a spot trading system following non-fulfilment of conditions.

Disclaimer

The above stock is picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. The above report is for informational purposes only.

1. Bajaj Hindusthan Sugar Ltd.:

Part of the Bajaj group, the company is the country’s leading sugar and ethanol manufacturing company with headquarters in Mumbai. The company’s 14 sugar plants are all located in UP. The company is also the pioneer of the country’s fuel ethanol initiative and as of now is producing 38 million litres of ethanol per year.

Through the bagasse produced in its mills, the company produces power, of which the company after meeting its own requirements, supplies a considerable portion to the UP State grid.

The company’s net sales for the June 2021 quarter came in at Rs. 1354 crore, while its net loss for the period stood at Rs. 40.55 crore.

M-cap -Rs. 2152 crore

52-week high price-Rs. 24.65

2. Dharani Sugars & Chemicals Ltd.:

Dharani Sugars And Chemicals Limited (DSCL) the flagship company of the PGP Group of Companies, Chennai was incorporated in the year 1987. DSCL has 3 integrated Sugar plants with a total crushing capacity of 10000 TCD, Co-generation Power plant of 37 MWs and Multi product distillery of 160 KLPD.

Net sales at the company for the June quarter surged to Rs. 29.45 crores from the preceding quarters figure of just Rs. 0.23 crore. Profit after tax at the company also narrowed down to Rs. -8.08 crore from the last quarter’s PAT of Rs. -13.74 crore.

M-Cap – Rs. 65 crore

52-week high price- Rs. 35.75

3. K.M. Sugar Mills Ltd.:

U.P based K.M Sugar Mills is engaged in the manufacture of sugar, distillery products as well as in power generation. Other than manufacturing the company is also into sugar export-import, sugar trading as well as other manufacturing activities. The company has a versatile team for procurement of sugar, logistics and sugar sale.

On a standalone basis, the company’s net sales increased for the June quarter period to Rs. 170.45 crore. Likewise, net profit more than doubled to Rs. 13.98 crore from the previous quarter. For the ongoing fiscal year, the company announced a meager interim dividend of Rs. 0.2 per share, for which the stock turned ex-dividend on August 18, 2021.

M-cap: Rs. 252 crore

52-week high price-Rs. 39.05

4. Parvati Sweetners and Power Ltd.:

Parvati Sweetners or PSPL, headquartered in Bhopal, Madhya Pradesh is a leading sugar manufacturing company. The company also produces by-products of sugar and has upgraded its facility to produce high-grade sugar.

The company’s net sales for the June ended quarter of Fy 2022 halved to Rs. 13.20 crore as against the previous quarter ended March. Net profit at the company also reduced substantially to just Rs. 0.1 crore as against Rs. 2.78 crore in the previous quarter.

M-cap: Rs. 54 crore

5. Rana Sugars Ltd.:

After its initial venture Agro Boards, Rana Group of companies forayed into sugar manufacturing and set up its first unit at Buttar Sevian, Punjab in 1993. Currently the group’s areas of operations are into sugar, alcohol, power generation as well as textiles.

In the year 2002, the company set up a Demonstration Co-generation Project to produce extra power from the Bagasse (by-product of sugar) and export it to Punjab State Electricity Board.

Net sales at the company saw a drop in the June ended quarter to Rs. 373 crore. Also, net profit at the company declined to Rs. 54.11 crore.

M-Cap- Rs. 396 crore

52-week high price- Rs. 38.3

6. SBEC Sugar Ltd:

A Modi group company, SBEC is into the sugar business and in fact it is the group’s oldest business established since 1932. In view of the growing demand, the group decided on adding another sugar manufacturing facility and thus in the year 1998, the group in collaboration with SBEC System Limited UK established SBEC Sugar Limited(SBEC).

The promoter company, SBEC System Ltd. is a global player in project design , engineering and consultancy.

M-cap : Rs. 115 crore

52-week high price- Rs. 42.05

7. Simbhaoli Sugars Ltd.:

Founded by Sh. Sardar Raghbir Singh Sandhanwalia, Simbhaoli, UP based sugar mill was started in 1933. The Simbhaoli group is a diversified farm-to-consumer Agri-Business and FMCG company with leadingr brands across categories such as staples, food, beverages, home and personal care, and agri-inputs.

The company brands include Trust classic, Sipp coconut water, G-low sugar among others.

Amid disruption in business due to the second wave, the company’s net sales registered a decline to Rs. 382 crore. Also, from the previous quarter the company reported a sharp drag in its profit figure to Rs. -4.6 crore as against Rs. 25 crore profit in the previous quarter.

M-cap: Rs. 119 crore

52-week high -Rs. 44.45

Shree Renuka Sugars:

The company is among the largest sugar producing companies globally. Headquartered in Mumbai, the company is a global agribusiness and bio-energy corporation. On a worldwide basis, the company is amongst the largest sugar refiners in the world.

The company runs 11 mills globally (four in Centre-South Brazil and seven in India) with integrated ethanol and power co-generation capacity. The company also has two large port based sugar refineries in India.

Net sales at the company reduced to Rs. 795 crore in the June ended quarter and during the same quarter the company posted net loss to the tune of Rs. 228 crore versus Rs. 114 crore profit in the previous quarter.

m-cap: Rs. 6258 crore

52-week high price- Rs. 47.75

Conclusion:

Sugar companies’ are boosting their ethanol production capacity in view of the government’s ambitious project on ethanol blended fuel and this perhaps would expand revenue generation opportunities for the sector as a whole. Sugar futures climbing to multi-year highs in the US markets and production cut expected in the world’s top most sugar producing nation-Brazil, sugar prices are set to remain high, thus sweetening the prospects of sugar companies in India.

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