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Lower costs to give margin lift

Three key takeaways from MCX’s FY21 result concall were: 1) significantly lower software costs under the new contract with TCS, partially offset by higher depreciation; 2) some of the cost savings achieved in FY21 may be sustainable; and 3) management positivity around the expected new gold exchange. Not only does the management expect gold futures volumes to be sustained, it also believes MCX has a ‘right to win’ from any new gold exchange initiative. Reduction in costs results in an upgrade in our operating earnings for FY23E. With limited traction in options/indices thus far, ADTV will continue to be the principal earnings determinant. Business model remains robust with structural monopoly, high operating leverage, and possible optionalities. Maintain BUY with a revised target price of Rs1,850 (earlier: Rs1,746).

Factoring-in Rs359bn/Rs408bn ADTV for FY22E/FY23E:

MCX has reported an ADTV of Rs313bn in FY21. We expect ADTV growth of 15% / 14% in FY22E / FY23E, which will result in revenue growth of 15.8% / 14.4%. April and May ADTV till date has been at Rs266bn and Rs332bn respectively. MCX plans to launch aluminum alloys and steel rebars in FY22. Bullion and metal indices are also being charged from Apr’21.

Expect FY22E/FY23E PAT at Rs2.5bn/3.1bn:

We expect EBITDA margin to improve from 47% in FY21 to 52.5% / 61% in FY22E / FY23E due to operating leverage and reduction in software costs w.e.f. FY23. We assume annual steady-state software cost of Rs200mn under the new contract with TCS vs Rs579mn in FY21. With the new software implementation from Jul’22, we build-in the new rates for half year to factor-in Rs450mn total software cost for FY23E. Accordingly, we also increased depreciation to Rs289mn in FY23 to arrive at PAT of Rs2.5bn/Rs3.1bn in FY22E/FY23E.

Major risks:

1) Possible impact on intraday futures volumes as upfront margin requirement is scaled up from 50% currently to 75% / 100% of the requisite margin from Jun’21 / Sep’21 respectively;

2) regulatory fillip to competition in the exchange business as mooted in the draft paper released by SEBI on 6th Jan’21;

3) competition to gold volumes from new proposed gold exchange. Positive surprise can come from higher ADTV (already reached Rs332bn in May’21) and any regulatory relaxation on margin norms (company has made several representations).

Maintain BUY with a revised target price of Rs1,850 (earlier: Rs1,746):

We value MCX at 35x FY23E core EPS of Rs48 and add distributable cash and investments (Rs170/share) to arrive at our target price of Rs1,850. Our core earnings estimates include operating income and investment returns from restricted cash.

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