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Near-term blip; long-term opportunities intact

In-house software to aid profitability

* 4QFY21 saw further normalization in bullion volumes, largely driven by 11%/15% sequential decline in gold/silver volumes. This was partially offset by a 56% sequential increase in crude volumes on the reversal of the higher margin requirements imposed earlier. Overall ADT dipped 3% QoQ, leading to 4% sequential decline in revenue.

* The impact on volumes during the quarter was the result of the second phase of implementation of new margin rules (50% of peak margin requirement) from 1st March. March volumes fell 16% MoM as the number of retail participants declined. However, volume recovery in May (to date) gives us the confidence that the new margin rules would gradually be accommodated by the participants.

* This – coupled with improvement in crude volumes on the reversal of initial margins and short option minimum margins to 20% (from 130% earlier) – should lead to a 22% CAGR in overall volumes for MCX over FY21–23.

* We expect the company to see significant EBITDA margin benefit once the new trading software (currently being developed by TCS) goes live. This, along with positive operating leverage, should aid consistent margin improvement. We expect a 770bp EBITDA margin improvement over FY21– 23E.

* We remain confident of higher institutional participation and an increase in the number of hedgers over the longer term. This should bring an overall depth to the market. We adopt a positive stance on the increasing volumes of underlying commodities, of which MCX would be the primary beneficiary.

* We cut our FY22E/FY23E EPS estimate by 3%/7%, factoring in some delay in crude volume normalization and the volume impact of new margin rules. We continue to like MCX for its near-monopoly in the Commodity Exchanges segment in India (market share of 96%). We value the company at 32x FY23E EPS. Reiterate Buy.

Beat on operations; PAT miss due to lower other income

* Revenue declined 8% YoY (est. 12% decline), EBIT grew 8% YoY (exp. 13% decline), and PAT fell 41% YoY (est. 37% decline) in 4QFY21. Revenue/EBIT/PAT increased 4%/19%/5% in FY21.

* Revenue stood at INR970m (-8% YoY), a 5% beat on our est. of INR923m.

* The EBIT margin at 39.3% was ahead of our estimate of 33.1%, led by higher revenue and lower employee expense.

* 4QFY21 PAT stood at INR384m (-20% YoY), a 7% miss due to lower other income.

* 4QFY21 volumes stood at INR20.3t, down 5.5% QoQ / 20.2% YoY.

* Crude volumes declined 78% YoY. However, volumes improved 56% QoQ on the back of margin reversal.

* Bullion volumes declined 2% YoY and 14% QoQ.

* MCX’s market share in commodities rose to 96% in FY21 from 94% in FY20.

* The company declared dividend of INR27.7/share, implying a payout of 76%.

Key highlights from management commentary

* The new software would go live in Jul’22. Over time, the new software is expected to change the way expenses are recorded. MCX has entered into a perpetual license deal with TCS, in addition to the fixed charges incurred by the company in the form of maintenance fees. The payment is not linked to revenues or transaction charges.

* The impact on volumes in 4Q and April has been the result of the implementation of the second phase of new margin rules. The management expects the rules to see gradual adoption over the longer term.

* Overall crude volumes were impacted by negative pricing in FY21. While margins have been reversed, the requirement of 20% is still higher than the international levels of 10–15%, which has resulted in lower volumes. There has been a huge client reduction in crude oil contracts.

Valuation and view – positive long-term prospects

* While we remain positive on a gradual increase in ADT, we factor in slower recovery in crude volumes, thus lowering our revenue growth estimate.

* Progress on other growth initiatives, such as bullion/metal index futures, gold spot exchange, and institutional participation, is also encouraging.

* We continue to like the company for its near-monopoly in the Commodity Exchange segment (96% market share) in India. We value the company at a 10- year average multiple of 32x FY23E EPS. Our TP of INR1,830/share implies a 15% upside. We reiterate our Buy rating.

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