Buy MCX Ltd For Target Rs.1,970 - Motilal Owal
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Volumes down 22% YoY in March on Phase 2 of margin rule implementation
* The total commodity volumes traded on MCX for March declined 22% YoY and 9% sequentially. ADT for March declined 26% YoY and 25% MoM. For 4QFY21, total volumes declined 20% YoY and 5% QoQ.
* The sharp decline was the result of the new margin rule implementation (Phase 2). In the second phase, which commenced on 1st Mar’21, the minimum requirement has been increased to 50% of peak margins.
* In the first phase (mandate of 25% peak volumes) of the margin rule implementation (Dec’20), MCX volumes declined 5% MoM; however, they quickly rebounded in Jan’21 with a 32% MoM increase.
* Bullion volumes in Mar’21 fell 29% YoY, entirely led by 46% YoY decline in gold volumes. This was partially offset by a 10% YoY increase in silver volumes. While silver volumes declined 24% sequentially, they still stand above Mar’20 levels – led by a rally in silver volumes last year.
* On a sequential basis, crude volumes increased 60% following a reduction in the minimum margin requirement to 50% (from 130%) and now to 20% by SEBI. However, on a YoY basis, crude (-54% YoY) is still dragging down overall traded volumes on MCX.
* Base metals continue to be a mixed bag. Aluminum, copper, and zinc volumes are up 120% YoY, 98% YoY, and 34% YoY, respectively. This is offset by 18% YoY and 4% YoY decline in nickel and lead volumes, respectively.
Valuation and view
* We believe after some initial moderation in volumes, they should rebound as participants get accustomed to the new rules. We have taken an increase of 16% QoQ in 1QFY22E volumes.
* We remain positive on a gradual increase in ADT thereafter. Progress on other growth initiatives – such as bullion/metal index futures, gold spot exchanges, and institutional participation – is also encouraging.
* We continue to like the company for its near-monopoly in the Commodities Exchange (97% market share) segment in India. We value the company at a 10-year average multiple of 32x FY23E EPS. Our TP of INR1,970/share implies an upside of 30%. Reiterate Buy.
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