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ADTV garnering tailwinds

Our estimate of Rs400bn ADTV for MCX in FY23E remains realistic on the back of recent tailwinds in the form of reduction in crude margin to pre-Covid levels, which has now finally been implemented, and continued volatility in commodity prices. While incremental higher upfront margin requirement in intraday trading is a headwind, the trend has been quite heartening with ADTV bouncing back to Rs368bn in the first week of February compared to Rs296bn/318bn in December/January). We upgrade MCX to BUY (from Hold) with a target price of Rs1,746 (unchanged).

* Strong surge in Feb’21 ADTV: MCX’s Feb’21 ADTV came in at Rs368bn in the first week of Feb’21 as crude average daily volumes jumped 118% from Jan’21 post margin relaxation. With effect from 27th Jan’21, MCX reduced the initial margin / short option minimum margin requirement to 10% and introduced staggered margins based on turnover. In Dec’20, the exchange had reduced the margin to 50% with no requirement for additional margins. Recovery in crude ADTV to Rs40bn in Feb’21 appears encouraging on MoM basis, but is still 70% below the FY20 ADTV of Rs130. Factoring-in the Rs360bn and Rs370bn ADTV in Feb’21E and Mar’21E, we expect MCX to clock a total turnover of Rs81.2trn (down 3% over FY20). We expect ADTV of Rs360bn/408bn in FY22E/FY23E with revenue/EBITDA/PAT CAGRs of 11%/21%/10% between FY20-FY23E and EBITDA margin improving from 51.3% in FY21E to 54.3% in FY23E. PAT CAGR is lower due to low tax base of FY20 (effective tax rate for MCX was 11% in FY20 due to MAT credit entitlement and write-off of previous years’ provisions).

* Feb’21 ADTV is up 16% MoM and down 2% YoY: MCX reported strong MoM growth in ADTV led by robust volume growth in crude (up 118% MoM), silver (up 14% MoM) and natural gas (up 14% MoM). Gold’s contribution to overall ADTV growth was marginal as the rise in its volumes was offset by drop in prices. Base metals’ contribution too remained weak.

* Our sensitivity analysis suggests base / bull / bear case earning CAGRs of 14% / 17% / 10% assuming ADTV CAGRs of 13% / 16% / 10% between FY21EFY23E. Materiality of new products (indices, which are getting priced w.e.f. 1st Apr’21) and options, remain additional optionalities.

* ADTV walk between Jan’21 (Rs318bn) and Feb’21 (Rs368bn) is more driven by volumes (+Rs42bn) than price (+Rs8bn). The leading volume drivers were crude, silver and natural gas.

* Change in technology: MCX has awarded the contract for implementation of commodity derivatives platform to TCS with a letter of intent to the latter to commence the project immediately. The technology-related costs for MCX were comparable to NSE and lower than BSE in absolute terms. Hence, an increase in that overhead is not out of place. A reduction in the cost can be a positive surprise considering technology expense as % of revenues for MCX is 18-20% vs 1.5% for NSE.

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