Tuesday, April 24, 2012

>MULTI COMMODITY EXCHANGE LIMITED: Initiate at Buy; Scarce Commodity

  Initiate at Buy: Structural growth opportunity — We initiate on MCX at Buy with a Rs1,580 target price based on 22x 1yr fwd PE. MCX is the dominant exchange (over 86% market share) for commodity derivatives trading in India. It has a highly scalable business, high returns and strong execution track record, and it looks well positioned to benefit from the industry’s strong growth potential long-term.

 India’s unique, competitive industry structure — a) Commodity exchanges distinct from stock exchanges with a separate regulator; b) Multiple competitors (five national exchanges); c) Closely regulated list of products and participants; and d) Pricing is low and based on turnover rather than number of contracts. It is still evolving in structure (regulations, products, competition) and has high growth potential. While this is likely to throw up significant opportunities, there will also be some challenges.

 Why we like MCX? — We believe MCX management is a step ahead in innovation, product mix and business volumes, and should retain its potent mix of high returns and potentially high growth. Key reasons for our positive bias: a) Rise in market share to 86% (FY12) from 45% (FY06) despite increase in competitive intensity; b) Strong turnover growth (59% CAGR over FY06-12) even amid declining commodity prices; c) High profitability (EBITDA margins of 59% in 9MFY12) and profit growth (36% CAGR over FY06-12); and d) Cash surplus, with no debt/capex requirements in near future.

 Key stock drivers — We believe key catalysts for the stock could be: a) Continued high turnover growth (we believe 20-25% growth sustainable without regulatory opening up); b) Hike in dividend payout; c) Regulatory changes allowing new products (options, indices, intangibles) and participants (FIIs, domestic institutions) – though timing is uncertain; and d) Potential value unlocking from strategic stakes in DGCX, MCX-SX (we assume nil value currently).

 Key risks — a) Cyclical business; b) Mono-line business segment and high concentration; c) High commodity prices; d) Competitive industry; e) Regulatory changes, and f) Potential conflicts of interest with parent and technology provider, FT.

To read report in detail: MCX