Buy MCX; target of Rs 1310: Edelweiss Securities
Edelweiss Securities’ research report on MCX
Q1FY18 marked another quarter of soft volumes post demonetisation for Multi Commodity Exchange of India (MCX) – ADTV fell 24% YoY/3% QoQ to INR188bn. However, better yield realisation of INR2.24/lakh (post upward revision in transaction charges) and controlled opex (up <7% YoY) supported earnings (PAT of INR263mn, in line with estimate). Positively, post GST implementation, some uptick in volumes was witnessed (ADTV >INR210bn in July). However, our earlier volume estimate of INR290bn for FY18 seems stretched given low price volatility, Q1FY18 trend, gradual roll out of options and introduction of institutional participation in phases. We, therefore, normalise our FY18 ADTV assumption to INR222bn (>20% cut) expecting benefits of option trading and institutional participation to be visible in FY19 instead of FY18. With volumes being a key driver of earnings growth, there is a similar cut in earnings as well. Given structural volume growth visibility (though now deferred beyond FY18), operating leverage benefits and MCX’s entrenched leadership, we assign 36x earnings multiple giving us a fair value of INR1,310 for the stock. Maintain ‘BUY’.
Initial signs of operating leverage benefits were visible in Q1FY18 and benefits will be more prominent when volumes see uptick in FY19. Volumes can possibly grow upwards of 30% in FY19 with options being rolled out and institutions (AIF, MF and PMS) also being allowed to trade by FY18, leading to spurt in earnings. At CMP, the stock is trading at 30x FY19E P/E. Maintain ‘BUY/SP’ with revised TP of INR1,310 (INR1,455 earlier).
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