Multiple catalysts ahead for MCX

Analysts say MCX could first launch options in gold and then in two-three more commodities by FY19

Final guidelines for trading in commodity options, issued last week, are a key positive for the Multi Commodity Exchange of India (MCX). 

The bourse could commence options trading in August-September and this segment is likely to contribute 10-11 per cent of FY19 revenue; it might not be significant in FY18. This is because it may start options trading in only one commodity at a time. 

Analysts believe MCX could first launch options in gold and then in two-three more commodities by FY19. In the long run, analysts at ICICI Securities expect commodity options to gradually outgrow the commodity futures market, due to the tax advantage on options vis-à-vis futures.  

There could be a host of positive developments for MCX. Allowing participation of institutional investors like alternative investment funds (AIFs), mutual funds into commodities, introduction of commodity indices and trading of index-based derivatives, and allowing banks to distribute commodity derivative products are some of these. 

As regulators grant a ‘universal exchange’ licence to some of the leading stock exchanges, MCX could witness heightened competition over the next year. It remains to be seen how that pans out but MCX’s leadership position and successful track record so far lends comfort.  

As a large part of MCX’s costs are fixed in nature, adding of new revenue streams will drive overall profitability. 

Analysts expect the exchange’s earnings before interest, tax, depreciation and amortisation (Ebitda) margins to rise from 25 per cent in FY17 to over 40 per cent in FY19, as new streams will boost revenue growth to 30 per cent, from 12 per cent in FY17. While there could be some uncertainty in the near term due to implementation of the goods and services tax (GST), trading volumes are expected to rebound strongly.

At current levels, MCX trades at 45 times the FY18 estimated earnings, higher than its historical average one-year forward price to earnings ratio of 25 times. These valuations are sustainable, as the company seems set to deliver robust financial performance and higher return ratios as it strives to achieve a higher scale. 

In this backdrop, most analysts are positive on the MCX stock. Their average target price of Rs 1,318 is an upside of 20 per cent from the current level.