MCX  delivered muted set of numbers in 2QFY19, revenue was down 2.4% QoQ to Rs 711mn (vs our est. of Rs 734mn), led by 0.3% QoQ drop in volume (Rs 15.8 TN)  and Rs 16.7mn impact from Liquidity Enhancement Scheme (LES). ADTV was up  1.2%  QoQ  and 12.2% YoY to Rs 246.55 bn led by Metals (+3.5%). Trading volume  has  picked-up  in Sep-18, ADTV is at Rs 273.78bn (+22% YoY) led by Metals  and  Energy.  Hedging  in Bullions is witnessing increased traction after  the  regulatory  push. Option volume registered strong growth in the quarter  (ADTV  of Rs 12.08bn, +121.3% QoQ, ~5% of futures) led by LES. The company  will start charging for options only in FY20E when it reaches ~10% of futures volume.

Progress  on  regulatory tailwinds like institutional participation (Banks, MFs, PMS) is slow. However, partnership with retail banks subsidiaries is a positive  and  can  boost volumes by additional 10%. BSE & NSE has launched commodity  derivation  trading  (Gold & Silver) in Oct-18. This can lead to rise  in  competitive  intensity,  pricing  pressure and some volume shifts however  this  opens the door for consolidation which can ease competition. Management  doesn’t  see  the risk of any major shift of volume and expects the  overall  market  size  to  increase.  We see value in MCX based on (1) Embedded  non-linearity,  (2)  ADTV  growth despite rising competition, (3) Cost  discipline  and  (4)  Net cash of Rs 14bn (~39% of Mcap). We estimate revenue/PAT  CAGR of 16/19% over FY18-21E. Maintain BUY with a TP of Rs 980 implying a P/E of 30x Sep-20E EPS.

Stock Information

(TP Rs 980, CMP Rs 742, MCap Rs 38bn)

Highlights of the quarter

• Bullion/Agri  ADTV  was  down 1.0/4.4% QoQ to Rs 54.65/3.78bn. Metals ADTV  was  up 3.5% QoQ to Rs 108.32bn while Energy was flat QoQ at Rs 79.80bn.
• EBITDA  margin  stood 32.2% down 198bps QoQ (vs our exp of 33%).
• Cost control  has  led  to  EBITDA margin expansion of 670bps in 6MFY19 to 33.2%.

Near-term  outlook:

Recovery in volumes will continue but Dec-18 is a seasonally weak month. In the nearer there is no pricing risk. Any consolidation in the industry will ease competition and can result in re-rating.

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