Multi Commodity Exchange of India Ltd. share price target

15 January 2019 Revenue grew 26% YoY to INR769m, in line with our estimate of INR766m. Futures volumes grew 34% YoY (+8% QoQ) to INR17t, dominated by crude (+78% YoY) and gold (+53% YoY). EBITDA margin of 27.2% (+500bp YoY, -500bp QoQ) was below our estimate of 34% due to higher other expenses (INR45m one-off). Excluding this one- time expense, the margin stood at 33.1% (90bp lower than our estimate). PAT growth of 124% YoY (to INR420m) exceeded our estimate of 68.5% YoY owing to higher other income (INR322m v/s our estimate of INR199m) and a lower tax rate (15.3% v/s our estimate of 24%), which emanated from some provisions and deferred tax. For 9MFY19, revenue/EBITDA/PAT were up 17.9%/47%/42% YoY. MCX highlighted that the uptick in volumes in recent past has not just been a function of volatility but also increasing participation. We expect volumes/revenue/earnings CAGR (FY18-21) of 20%/16%/22%.

Maintain BUY with a TP of Rs 980 implying a P/E of 30x Sep-20E EPS. MCX delivered muted set of numbers in 2QFY19, revenue was down 2.4% QoQ to Rs 711mn (vs our est. of Rs 734mn), led by 0.3% QoQ drop in volume (Rs 15.8 TN) and Rs 16.7mn impact from Liquidity Enhancement Scheme (LES). ADTV was up 1.2% QoQ and 12.2% YoY to Rs 246.55 bn led by Metals (+3.5%). Trading volume has picked-up in Sep-18, ADTV is at Rs 273.78bn (+22% YoY) led by Metals and Energy.

23 October 2018 Revenue increased 5.7% YoY to INR711m (2% below our estimate of INR726m) in 2QFY19. Lower-than-estimated revenues in the case of MCX are explained by either realization (mix of high- and low-volume orders) or by contribution of non-transaction revenues. EBITDA margin of 32.2% missed our estimate of 38%, led by [1] lower revenues and [2] higher Software expenses (INR145m v/s estimate of INR115m). PAT increased 23.3% YoY to INR359m (7.6% beat) owing to a lower tax rate (13% v/s 25%), which emanated from some excess provisions written back and deferred tax. MCX is expected to start monetizing Options in FY20, and there will be no transaction charges in 2HFY19 either. We expect volumes/revenue/earnings CAGR (FY18-20) of 19%/13%/16%. In our view, this merits caution not only from the perspective of potential loss of market share, but also in terms of any unexpected cut in pricing in the near future.

Maintain BUY with a TP of Rs 1,050 implying a P/E of 30x FY20E EPS. MCX delivered decent set of numbers in 1QFY19, revenue was up 3.2% QoQ to Rs 729mn (vs our est. of Rs 742mn), led by 5.5% QoQ rise in volume (Rs 15.8 TN) offset by 2.2% drop in realisations. ADTV was up 2.2% QoQ and 29.8% YoY to Rs 243.60 bn led by rise in Bullion (+5.7% QoQ) and Metals (+9.0%). Bullion volume has started to recover and current ADTV is only at 56% of the pre-demonitisation level, thus scope for catch-up is immense. Options volume jumped significantly (~12x) after introduction of LES in April-18 (ADTV of Rs 5.46bn vs Rs 0.46 in 3Q).

Maintain BUY with a TP of Rs 1,040 implying a P/E of 30x FY20E EPS (earlier 35x). MCX delivered robust set of numbers in 4QFY18, revenue was up 12.4% QoQ to Rs 706mn (in-line with our est. of Rs 716mn), led by 17.8% rise in volume to Rs 15TN. Total ADTV was up 17.8% QoQ and 22.6% YoY to Rs 238.2 bn led by rise in commodity prices and volatility. Encouraging part is that volume traction is even stronger in April-18, ADTV is up 26% QoQ to Rs 299.3bn led by 13/27% rise in bullion and metals volume.

MCX's 4QFY18 revenues grew 15.8% QoQ to INR706m v/s estimate of INR694m. EBITDA margin expanded ~12pp QoQ to 34.1%, compared to our estimate of INR34.8%. PAT grew 81% QoQ to INR340, in line with our estimate of 343m.The smart growth in sequential financial performance was a function of 17%QoQ growth in volumes to INR15t.

Lackluster volumes in Options since its launch in October 2017 Universal licenses becoming effective in October 2018, allowing for entry of competition and, thus, putting MCX's market share under threat Recent media articles citing CBI investigations into wrong-doings by erstwhile Forward Markets Commission (FMC) officials in granting MCX a nationwide commodity derivatives exchange status, as well as relaxation of rules for promoter shareholding before the company's IPO in 2012

Overall volumes for MCX have been soft because of multiple issues (demonetization, GST, PMLA) reducing Bullion volume to nearly a half in a span of a year. Over 9MFY18, while volume in Bullion declined by 30% YoY, that in Base Metals increased by 17%, thereby stemming the overall volume decline to 8%. The contribution of Bullion to overall volume has now come down to 23% (from 30% last year), whereas that of Base Metals has moved to 43% (from 34%).

Maintain BUY with a TP of Rs 1,165 implying a P/E of 35x Dec-19E EPS. MCX delivered bad set of numbers in 3QFY18, revenue was down 9.4% QoQ to Rs 610mn (our est. was Rs 615mn), led by 7.9% fall in ADTV. Options trading started in Oct-17 but the volume pick-up is very slow vs. expectation. Options ADTV stood at Rs 1.40bn (only 0.7% of futures ADTV, target is to reach 20-30% in the next six months). MCX is planning to launch four to five additional options contract in the next few months.

MCX's 3QFY18 revenue came in at INR610m, 2% below our estimate of INR621m, led by a slight decline in realization. Operating expenses stood at INR475m, exceeding our estimate of INR453m by 5% due to one-off expense (INR20m) toward events hosted by MCX in 3Q ??? excluding which operational results were in line. PAT of INR188m (below our estimate of INR283m) was dragged lower, as other income of INR156m missed our estimate by 39% due to MTM losses on fixed income instruments. The bullion-led volume decline at MCX commenced in Dec'16 ??? the month post demonetization. In the subsequent 12 months (Dec???16 to Nov'17), gold/silver volumes declined 47/31% YoY, leading to an overall volume decline of 17% YoY. However, with the quantum of decline reducing dramatically and the sharp uptick seen in base metal volumes (19% YoY), growth can be expected to return in the next quarter.