CMP Rs1,318, Target Rs1,510, Upside 14.7%
Financial Technologies promoted Multi Commodity Exchange is a market leader in India’s burgeoning commodity derivatives market. Its journey of becoming a dominant commodity exchange with 86% market share has been fascinating. Interestingly, the next largest player has only 10% market share.
The domestic commodity derivatives market after being opened up in 2003 has witnessed robust 85% CAGR in turnover. This was driven by widening commodity portfolio and rising interest in hedging and speculation due to increasing price volatility. In the aforesaid time, MCX registered a much stronger 200% CAGR in its turnover.
MCX’s strategic initiatives of building a globally referable commodity portfolio, product innovation, global strategic alliances and cutting edge trading technology helped it garner a dominant market share. More importantly, trading depth/liquidity has substantially improved and remains a cornerstone of its dominance.
Aided by increasing turnover and fixed cost leverage, MCX’s OPM has seen tremendous expansion; doubling to 63% over FY08-12. With further room for capacity utilization improvement, margin will most likely be sustained at elevated levels. Lower capital requirements suggest stable to improving cash flows in future, possibly translating in higher dividend payouts.
The opportunity for growth remains huge given a much lower derivative turnover/total physical flow multiple of India versus the developed markets. For instance, gold turnover on MCX is just ~15x of the total physical flow in the economy versus 75-85x in the developed economies. Similar is the case for crude, aluminium, copper among others. Additionally, positive regulatory announcements (passage of FCRA bill) could open host of growth avenues.
We conservatively estimate revenue/earnings to witness 14%/15% CAGR over FY12-14 considering recent moderation in revenue growth. Current valuation of 17.5x FY14E P/E is inexpensive for a secular growth story like MCX; also attractive in comparison with emerging market peers. Initiate with BUY and 9-month TP of Rs1,510. Company’s investment in MCX-SX can provide further upside to our price objective.