Opportunity abound
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.
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