Monopolistic. Cutting-edge. Xciting!
Dominant share; future ready; high growth potential
Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodities
futures exchange, with near monopolistic market share (86% in FY12).
Our expectation of sustained market leadership stems from its technological edge
and future readiness.
MCX's volumes have grown at a CAGR of 47% over FY07-12. Future potential remains
exciting given: [1] likelihood of new products and participants with the FCRA Bill, [2]
with 2m client accounts as compared with 19-20m demat accounts, the industry has
only scratched the surface with respect to potential volumes.
We believe value from MCX-SX (Stock exchange promoted by MCX and FTECH in
2008) is more definite than merely option value. Policy to maintain ~50% payout ratio
is a key valuation positive. Our target price of INR1,440 implies 23% upside. We
initiate coverage with a Buy rating.
Leading exchange, with contract volumes matching global leaders
Multi Commodity Exchange of India Limited (MCX) is a state-of-the-art electronic
commodity futures exchange, offering futures trading in over 47 commodities,
mainly including Gold, Silver, Copper and Crude Oil. It began operations in
November 2003, and has over 86% share (as at 31 March 2012) of the Indian
commodity futures market. In terms of contracts traded in CY11, it is the thirdlargest
globally, second-largest in Gold, largest in Silver, second-largest in Natural
Gas, and third-largest in crude oil.
5-year volume CAGR of 47%; huge growth potential
Volumes continue to grow at a healthy rate in a less-than-a-decade old and
highly regulated industry (CAGR of 51% over FY09-12). At MCX, volumes have
grown at a CAGR of 47% over FY07-12. Growth potential remains huge:
1) Number of clients trading on the commodities platform are less than 2m, as
compared to an estimated 18-20m in equities. Globally, the number of clients
trading in commodities is higher than those trading in equities.
2) Globally, futures Gold volumes are 70-80x that of physical trade, v/s 17-18x
in India, 20x in Crude v/s ~7x in India, 100x in Aluminum v/s 8-9x in India.
Technological edge, future readiness to help sustain market leadership
MCX has held on to its market leadership position, with a share of 82-87% over
FY09-12. Supply of technology platform by its parent, Financial Technologies
India (FTECH), one of the leading developers of exchange related software and
technology, gives MCX a competitive edge that is difficult to replicate. If and
when commodity exchanges in India receive regulatory approval to trade in
new products like options, MCX will be able to quickly latch on to the opportunity,
having invested significant resources to ensure readiness for the same.
Additionally, new revenue sources like market data products and information
offerings will lend scalability.
Two potential value drivers
#1: Regulatory changes post the passage of the FCRA Bill: We understand from the
management that the Bill to amend the outdated Forward Contracts (Regulation)
Act (FCRA) could be passed by the Parliament in the forthcoming session. This will
give a fillip to MCX's volumes on the following counts:
1) introduction of options trading,
2) introduction of new commodity classes such as freight, rainfall and commodity
indices
3) increased investor participation, as banks, mutual funds and foreign institutional
investors could be allowed to transact on India's commodity futures markets.
#2: Value unlocking from MCX-SX: MCX-SX is a stock exchange recognized by SEBI,
that was promoted by MCX and FTECH in 2008, with currency futures and options
currently trading on the exchange. MCX-SX was recently cleared to become a fullfledged
stock exchange. Despite intense competition, we do not rule out the
possibility of the exchange garnering significant share, even if not match NSE's coup
over what was largely a BSE dominated space till 1992. The last transaction in NSE
happened at 11x revenues, which is also the multiple at which emerging market
exchanges like the Singapore Exchange trade. We expect MCX's revenues to surge
from INR391m in FY11 to at least ~INR1b by FY13, on:
1) 7 months of transaction charges in currency futures segment in FY12
2) additional 4 months of transaction charges in currency futures in FY13 and ~8
months of revenues from currency options
3) potential revenues from launch of equity operations.
Sustainable growth; value unlocking; healthy payout - Buy
MCX's volumes have grown at a CAGR of 47% over FY07-12. With the industry nascent,
and growth potential significant from multiple triggers, we expect sustained double
digit volume growth over the medium-to-long term, notwithstanding impact from
phases of low volatility.
We expect volume CAGR of 15% and PAT CAGR of 13% over FY12-15. Also, the RoE
should sustain at the high 20's. The company's decision to maintain its payout ratio
at ~50% too is a key valuation positive, and will support high multiples.
We value the standalone commodity exchange business at 20x FY14E earnings, in
line with the average multiple for global peers in emerging markets, despite MCX's
better competitive positioning and higher growth potential. This translates into a
value of INR1,330/share for the standalone commodity exchange business. We value
MCX-SX at INR14b, 11x the potential revenues of INR1.3b in FY14 (transactions in
FY10 had valued MCX-SX at INR45b). MCX's share in MCX-SX (including warrants)
contributes additional INR110/share to its valuation. Our target price is INR1,440.
Buy for 23% upside
Key positives
Near-monopoly market
share
Huge potential to grow
volumes
Future-readiness
Likely FCRA boost
Potential value
unlocking from MCX-SX
Payout ratio
Key risks
? Commodity prices
? Increase in
transaction fee by
FTECH
? Regulatory
environment
? Concentration risk
No comments:
Post a Comment