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.
