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Market leadership, options volume to aid earnings…

About the stock: MCX is the leader in commodity derivatives exchanges in India with ~93% market share in terms of commodity futures turnover.

* It has ~100% market share in precious & base metals and energy

* Presence in various commodities offers healthy diversification

Q2FY22 Results: MCX’ dip in ADTO impacted revenue & earnings.

* Average daily futures turnover (ADTO) declined ~32% YoY to | 25797 crore due to increase in margin requirement

* Option ADTO gained traction from | 1900 crore to | 6023 crore QoQ

* Operational revenue down ~30% YoY; other income down 10% YoY

* Earnings at | 33.2 crore; down 16.8% QoQ & 43% YoY

What should investors do? MCX’s share price has grown by ~1.7x over the past five years (from ~| 1054 in July 2016 to ~| 1,798 levels in October 2021).

* Being a market leader in commodities exchange and a beneficiary of increase in option volume, we retain our BUY rating on the stock

Target Price and Valuation: We value MCX at ~46x core FY23E EPS and net cash and maintain our target price at | 2000

Key triggers for future price performance:

* Charging options from Q3FY22 & non-linear growth in volume to aid growth

* Recent court ruling allowing long term electricity contracts to trade on exchange provides optionality though timeline for launch is to be watched

* Market leadership makes MCX a primary beneficiary of rise in volume

* Diversified product mix aids top-line amid volatility in prices

* Continued addition of participants to aid volume growth

Alternate Stock Idea: Apart from MCX, in our coverage we also like 5Paisa.

* It is a leading discount broker and offers a play on new age fintech financial intermediary with robust client addition

* BUY with a target price of | 530

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