Impacted by lower realization and cash yield
* Revenue miss, costs stable: MCX’s 1QFY18 revenue declined 6% YoY to INR592m v/s our estimate of INR641m. Yield for the quarter declined 0.5%, driving revenue miss. Operating expenses were INR460m, in line with our estimate of INR462m. Consequently, EBITDA was INR132m (22.3% margin, -12.8pp YoY), below our estimate of INR169m. PAT of INR263m (below estimate of INR427m) was dragged further by lower other income of INR277m v/s estimate of INR312m.
* Volumes remained weak, dragged by bullion: Volumes during the quarter were down 3.4% QoQ and 24.8% YoY, dragged mainly by bullion – Gold (down 3.5% QoQ and 52.8% YoY) and Silver (up 4.7% QoQ but down 39% YoY). Contribution from Gold and Silver combined was 28% of overall volumes, down from 40% in 1QFY17. Crude too suffered YoY, down 24%, though QoQ volumes were stable at 6.1%. Concentration from crude, however, has held on at 28.2% (v/s 25.7% in 4QFY17 and 28% in 1QFY17).
* Multiple triggers should help volumes: MCX cited expectations of recovery in volumes, led by multiple triggers:  Implementation of GST, which has been an overhang on bullion due to low stocking levels in the physical commodity,  Launch of options in Gold sometime in 2QFY18, followed by other commodities in 3-6 months and  Expectation of category-II AIFs (recently allowed by the SEBI to trade in the segment) to start operations in commodity derivatives by the end of 2QFY18. Post GST implementation, bullion volumes are already seeing an uptick at ~INR10-12b per day.
* Valuation and view: MCX has retained its market leadership position with a share of 80-90% over FY09-17, even in the most turbulent of months during FY13-15, when the parent’s existence was in deep waters on issues of fraud around the National Spot Exchange (NSEL). With the SEBI’s reforms underway, we see volumes on the path to significant recovery, from new products and participants. With operating margin on incremental volumes at ~80%, this would boost operating profits for MCX. We expect earnings CAGR of 28% over FY17-19. Our price target is INR1,300, which discounts forward earnings by 30x. Buy.
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