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.
(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%.
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.