Multi Commodity Exchange - A rare commodity; initiating coverage; Buy: Edelweiss, PDF link

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Multi Commodity Exchange (MCX IN, INR 935, Buy)

CommEx: A resilient business model with an active spot market

An active spot commodity market in India will give impetus to hedging/arbitrage demand, thereby sustaining commodity futures volumes over long term. Increased participation and continued volatility will further aid volumes. After registering 37% CAGR over FY07-12, we expect moderate growth in industry-wide commodity futures volumes in low double-digit over FY12-14 against the backdrop of recent price pressure / reduced volatility in some commodities. Multiple levers like option trading; banks, FIIs, MFs participation; and introduction of intangibles can act as additional triggers.

MCX: Firmly entrenched leader shielded by entry deterrents

Multi Commodity Exchange (MCX), from inception, has structurally altered dynamics of commodity futures market by introducing global commodities. Driving >90% of incremental growth in futures volume over FY06-12, it commands 85% market share in India and is the third largest commodity exchange globally. Though there is perceived risk of competition, deterrents acting in its favour are: (a) High/sticky liquidity, lowering impact cost; (b) MCX-quoted price a benchmark; and (c) shareholding cap.

Technology: Parents domain expertise; lower initial set up cost

The exchange draws strong support from Financial Technologies’ (FTIL, MCX’s promoter) technological expertise. While MCX’s operating technology cost, at 13% of revenue, is higher than global exchanges (in absolute terms,

Outlook and valuations: A rare commodity; initiate with ‘BUY’

MCX, with eight years of operating history, is in the growth phase of its life cycle. While structural levers are in place for upward trajectory in volumes over the long term, in the interim, we expect volume growth to moderate. Considering steady yields and higher float income, we expect 10-12% CAGR in revenue and PAT over FY12-14E. The stock is currently trading at 14.8x FY13E earnings, 15-20% discount to CommExes in developing markets. We initiate coverage with ‘BUY/Sector Outperformer’. Key risks are: (i) regulatory issues (implementation of proposed measures, imposition of CTT etc); and (ii) higher dependence on few commodities.

Multi Commodity Exchange - A rare commodity; initiating coverage; Buy

Regards,