Structural growth drivers in place for MCX

Apart from the increase in transaction charges, the exchange stands to gain from a nod to launch new products such as commodity options

Multi Commodity Exchange of India (MCX) has been surrounded with a host of positive newsflow in recent times. The exchange stands to gain from potential introduction of new products such as commodity options which could soon become a reality.

Further, in a surprising move, MCX raised transaction charges for non-agri commodities (gold, silver, crude, etc) by 25 per cent on Tuesday. Non-agri commodities contribute 70 per cent of MCX's total volumes.

"This will increase the company’s transaction revenue by 20 per cent plus after considering marginal adverse impact on volumes due to rise in charges and consequently boost earnings as well," says Kunal Shah, Financials analyst at Edelweiss Securities.

Shah has revised MCX's transaction revenue estimate for FY17 and FY18 by 7 per cent and 16 per cent, respectively. His earnings estimates, too, are up 8 per cent and 19 per cent for FY17 and FY18, respectively.

Given this backdrop, it is not surprisingly the stock has been gaining momentum. It made a 52-week high of Rs 1,181.35 on Tuesday. In fact, the MCX scrip has outperformed the S&P BSE Sensex having surged 21 per cent in the past one year versus a 10 per cent increase in the benchmark Sensex. But, the best is not behind the scrip yet.

Introduction of commodity options and participation of institutions such as FIIs and banks in the commodities markets will act as key catalysts for higher volumes at MCX. These measures could lead to a shift of customers from unorganised to the organised market. Even without considering these catalysts, the management is confident of growing its volumes by 10-15 per cent.

This is a meaningful improvement from volume growth of 8.7 per cent witnessed in FY16. Currently, Bloomberg consensus estimates peg MCX's revenues and net profit to grow at a compounded annual rate of 34 per cent and 24 per cent, respectively over FY16-FY18. Strong earnings growth should also support robust expansion in the company's return on equity ratio from 7.8 per cent levels in FY16 to about 11.8 per cent in FY18, estimate analysts at IIFL.

Listing of National Stock Exchange (NSE) could lead to better price discovery and further aid MCX's valuations, believe analysts. The same though is still some time away. Post merger of SEBI and FMC, equity exchanges will be allowed to launch commodities trading platform, and this is a potential risk which may hurt MCX's market share as well as profitability.

"This may be a medium- to long-term risk as equity exchanges like NSE and BSE have a strong reach with good FII relationships", writes leading brokerage CLSA in a recent note on the company.

However, given MCX's continued leadership position with a value market share of 84 per cent, the company is well poised to defend its position in case of intensified competition. As reported in media, any stake sale to Chicago Mercantile Exchange (CME) would also act as a key stock price trigger.