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Buy Multi Commodity Exchange of India Ltd For Target Rs.1,890

Awaiting volume pick-up; recovery needn’t be linear

The key question for MCX is its ability to recover volumes post the impact of higher margin trading norm. Basis H1FY22 ADTV (14% / 17% lower than FY20 / FY21), we have cut FY22E ADTV from Rs358bn to Rs312bn. However, the ADTV recovery is not bound to be linear. As such, we have cut FY23E ADTV by only 5% to Rs390bn.

Considering the reported ADTVs of ~Rs324bn in FY20, Rs312bn in FY21, Rs433bn in Aug’20 and Rs368bn in Feb’21, ADTV of Rs390bn is achievable by FY23E, which should translate to FY23E EPS of Rs61.4 implying 26x FY23E P/E at CMP. Maintain BUY with a revised target price of Rs1,890 (earlier: Rs1,930) based on 35x FY23E core EPS of Rs49.3 and free cash of Rs168 per share.

* Margin norms impacted trading volumes in FY22-TD, but maximum impact is behind us.

MCX trading volumes have continued to trend lower post the implementation of margin regulations. Compared to Q1FY22 ADTV of Rs277bn, Aug’21 ADTV came in at Rs250bn and that in Sep’21-TD has been Rs231bn. Sep’21-TD ADTV is down 8% MoM and 32% YoY. Drop in ADTV is largely due to lower volumes traded for key commodities. On YoY basis, gold / silver / crude oil / natural gas / copper volumes are down 53% / 57% / 31% / 40%.

* Options volumes offer respite though contribution to revenues remains low:

FY22-TD options have seen good traction led by crude, which has contributed ~70% to total options volume in FY22-TD. For Sep’21, options ADTV (based on notional turnover) has been Rs88bn vs Rs9bn in FY21. Based on our estimates, we expect options premium turnover to increase to Rs249bn in FY22E and Rs299bn in FY23E. Options will be charged from 1st Oct’21 onwards. Therefore, assuming an average realisation of Rs450/mn on premium turnover (1.5% of notional turnover), we expect options to contribute Rs112mn/Rs269mn in FY22E/FY23E revenues respectively

* Participant-wise turnover:

Analysing the participant-wise turnover, we see the share of others (largely retail) dipped from 67% in Apr-May’21 to 63.6% in Aug’21 in the futures segment. In the options segment, share of others has shrunk from 61%/64% in Apr’21/May’21 to 52% in Aug’21. Share of hedgers and Proprietary has remained stable at 4% and 32% respectively between Jul’21-Aug’21.

* Change in earnings estimates:

We have trimmed our revenue / earnings estimates by 10% / 12% as we model flattish growth in ADTV in FY22E. We are factoring-in an ADTV of Rs390bn (earlier: Rs408bn) for FY23E, which leads to revenue/earnings cut of 1%/2% in FY23E. Maintain BUY with a revised target price of Rs1,890 (earlier: Rs1,930) based on 35x FY23E core EPS of Rs49.3 and free cash of Rs168/share.

Valuation

We value MCX at 35x FY23E core EPS of Rs49.3 and add distributable cash and investments (Rs168/share) to arrive at our target price of Rs1,890. Our core earnings include operating income and investment returns from restricted cash.

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