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Market leadership, new products to drive earnings

MCX reported a moderation in average daily turnover (ADTO) attributable to upfront margin requirement impacting volume. Operational performance remained healthy led by steady revenue and controlled opex. Volatility in other income and tax advantage in base year led to decline in earnings. ADTO in commodity futures on the exchange declined 13% to | 31823 crore in Q4FY21, due to increase in regulatory requirement of upfront margin partially offset by higher gold priced compared to last year. Markets share in commodity futures space has remained strong at 96.04% in FY21. Number of unique customers increased from 51.5 lakh in Q3FY21 to 60.2 lakh in Q4FY21 while authorised person count was at 52777.

Decline in ADTO (13% YoY) was partially offset by healthy realisation keeping moderation in operational revenue at ~8% YoY to | 97 crore. Tight control on cost led EBIDTA at | 44.2 crore, up 8.7% YoY, though sequentially declined 9.1%. Subsequently, EBITDA margin increased ~700 bps YoY to 445.6%. However, lower other income at | 11.5 crore in Q4FY21 (led by Gsec yield in narrow range) vs. | 29.7 crore in Q4FY20 and utilisation of MAT credit in last year led earnings decline to | 38.5 crore; down ~41% YoY. Core PBT (PBT excluding other income) has increased 8.8% YoY.

ADTO to show gradual rise post near term hiccup

Implementation of second phase of regulatory requirement of upfront margin is seen having impacted volumes. However, a gradual pick-up is seen in volumes in subsequent months as system stabilises. Further, scaling up of margin requirement is expected to keep ADTO volatile in the near term, post which the same is expected to stabilise. Gradual improvement in crude price coupled with reduction in margin requirement from 130% (levied post crude prices got negative) to 50% is seen boosting volumes, though further reduction is required to bring in substantial flows. Pick-up in options & index futures (ICOMDEX Bullion, ICOMDEX base metal indices) are expected to add to volume growth and revenue ahead. Also, engagement of new partnership and technology is expected to propel participation including retail clients.

Valuation & Outlook

Continued volatility in commodities amid fast changing scenario is seen driving volumes and thereby earnings, though regulatory regime may lead to near term hiccups. We remain positive on MCX owing to: 1) continued market leadership, 2) rebound in prices of non-precious metals, 3) gradual pick up in index-based products, 4) continued addition of participants. The exchange has started to charge on index future (that was free until now), which will add to revenue trajectory. We expect ADTO to gradually accelerate to ~| 105 lakh crore by FY23E. Hence, revenue, earnings are expected to grow at ~12%, 13% CAGR in FY21-23E to | 488 crore, 291 crore, respectively. We maintain our TP at | 2000, valuing MCX at ~40x FY23E core earnings, adding net cash after deducting SGF. Maintain BUY.

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