Multi Commodity Exchange of India - A rare commodity - ICICI Securities

We initiate coverage on Multi Commodity Exchange of India (MCX) with an BUY rating and a target price of Rs1,047 based on 18x FY15 PER. Though we see Commodity Transaction Tax (CTT) as a near-term overhang, MCX's fundamental drivers remain intact – a] MCX leads the still nascent Indian commodities trading, b] debt-free company with attractive yields (free cash flow yield 5.3% and dividend yield 2.8%) despite low earnings growth, and c] high operating leverage which make it poised well enough to benefit from pick-up in trading volumes.

- CTT-driven volume dip unavoidable in FY14...: After reaching a historic high in FY12 (Rs503bn), MCX's Average Daily Trading Value (ADTV) levels have dropped 5% in FY13 due to lower bullion ADTV. This base contracts further with our assumption of a 15%YoY dip in FY14 driven by CTT implementation.

- ...but fundamental drivers remain intact: Our commodities trading market is nascent, and sustained efforts by MCX to enhance member participation, inherently volatile nature of commodities should bode well for ADTV pick-up from a low base. Despite lower earnings growth in FY13E and FY14E, free cash flow yield is 5.3%. At a 50% dividend payout, dividend yield is attractive at around 2.8%.

- Undisputed leader in a nascent space: MCX occupies a dominant position in commodities trading, with a market share of 87% in FY13. The company has been able to provide strong liquidity and lower impact cost for its key traded commodities, thereby creating strong entry barriers for other exchanges.

- High operating leverage: Since majority of cost is fixed/semi-fixed in nature, an increase in turnover can sharply improve the EBITDA margin and profitability for the exchange. EBITDA margin improved significantly from 36% in FY09 to 64% in FY12 on the back of improved volumes.

- Options an immediate game changer if FCRA Bill is passed: Our model does not factor the implementation of Forward Contract Regulation Act (FCRA) but if the Bill is passed, options, indices, institutional participation (banks, insurers, MFs, FIIs) will be permissible which will provide a significant structural upside to MCX volumes.

- Initiate with BUY: The stock price has receded sharply by 45% from its peak levels and is currently trading at a PER of 19.3x FY14E and 15.6x FY15E earnings. We initiate with a 'BUY' rating and value the company at 18.0x FY15 PER. Our target price is Rs1,047 while the DCF-based value comes to Rs985.

Source : Equity Bulls

Keywords