MULTI COMMODITY EXCHANGE (MCX)

Transcription

1 INVESTMENT IDEA 31 MARCH 2017 MULTI COMMODITY EXCHANGE (MCX) Industry CMP Recommendation BUY on Dips to band Target Time Horizon EXCHANGES Rs BUY on declines Rs Rs Year HDFC Scrip Code MCXLTDEQNR BSE Code NSE Code Bloomberg MCX MCX CMP as on 31 Mar Equity Capital (Rs mn) 510 Face Value (Rs) 10 Equity O/S (mn) 51 Market Cap (Rs mn) Book Value (Rs) 257 Avg. 52 Week Volumes Week High Week Low 814 Multi Commodity Exchange of India (MCX) is engaged in Facilitating Trading, and Clearing and Settlement of Commodity Derivatives. It operates as a commodity futures exchange. It offers its products in various segments, such as Bullion, including Gold, Gold Mini, Gold Petal and Silver; Base Metals, including, Aluminum, Copper, Lead, Nickel and Zinc; Energy, including Crude Oil, Brent Crude Oil and Natural Gas, and Agro Commodities, including Cardamom, Cotton, Crude Palm Oil, Kapas and Mentha Oil. Its MCXCOMDEX is a realtime commodity index based on commodity futures price of an exchange. Other commodity indices developed by the Company include MCXAgri, MCXEnergy and MCXMetal. Its online trading platform is accessible to its members through its trader workstation or computer-to-computer link (CTCL) using multiple connectivity media, including point of presence (POP) connectivity, very small aperture terminal (VSATs) and the Internet. Investment Rationale: SEBI on its 1st anniversary as a regulator, allowed options trading in the commodity derivative segment. It was a keenly discussed, awaited and a critical reform required to drive overall commodity derivative market development. Options will help in attracting more hedgers and retail clients; bring more liquidity and depth in the market. The circular states that exchanges that are willing to start options trading could do so but after taking approval from the regulator. However the circular has not mentioned (1) commodities that have been allowed, (2) date for commencement of trading and (3) the pricing mechanism. SEBI said that detailed guidelines will be issued in relation to this, shortly. Shareholding Pattern (%) Promoters 15.0 Institutions 46.2 Non Institutions 39.8 Total PCG Risk Rating* * Refer Rating explanation Red We expect options to start trading by Q4 FY18E and initially option contracts will commence trading in highly liquid commodities like Crude, gold and silver. Currently Bullions and Energy constitute for ~70% of total turnover. Globally, option contracts constitute ~42% of the total contracts traded (both equities and commodities). If we consider only commodities derivative market, options constitute only ~6% of the total traded volume. This low contribution of options to overall volume is primarily because options are not traded in China. Dalian commodity exchange (China), The Shanghai Futures (China) and CME group account for ~70% of the total traded volume globally for commodities. The Multi Commodities Exchange (MCX) has set its sights on strengthening its position in the agri commodities segment and consolidating its presence in the non-agri segment. Devarsh Vakil devarsh.vakil@hdfcsec.com Private Client Group - PCG RESEARCH P a g e 1

2 It has plans to introduce many products that are not available for derivatives trading so far. The products include robusta coffee, whose exports are rising. The MCX found a large number of people interested in hedging the crop or consumers and exporters looking for hedging coffee procurement price risks with the expansion of retail coffee chains. The exchange is said to be exploring futures in tea but the issue is that there are several varieties and grades and standardising contracts is not so easy. So, the move is likely to boost further MCX s positioning in terms of revenues and profitability. As far as Non-Agri is concerned, company intends to consolidate its position with contracts in precious metals and bullion, deliverable contracts in base metals and some more in the energy sector, all aimed at increasing connectivity with the physical markets in metals & energy. Multiple Positive Triggers to drive revenues and PAT We expect options trading in commodities to start by Q1 FY18E We have incorporated options volumes in our ADTV (Average Daily Trading Volume) estimates and have assumed options ADTV to be ~50% of current futures turnover in 4QFY17E and will gradually increase to ~75% by FY18E. Total ADTV is expected to increase by 33/71% to Rs 292/500bn in FY17/18E respectively. We have assumed ADTV to reach the pre-ctt level by FY18E and can cross that significantly in subsequent years. The realisation from options is only ~20% of futures realisation as the transaction charges in options is levied on the premium turnover which is only ~2-3% of notional turnover. We assume that options trading will boost ADTV by 11/43% while realisation will be impacted by -9%/-34% in FY17/18E respectively. Due to lower options realisation the blended realisations to fall 20.5% in FY18E offset by hike in transaction charges. This ADTV assumption isn t contingent on successful forays of the company in any new commodity areas, which can pose upside risks to our assumptions. Private Client Group - PCG RESEARCH P a g e 2

3 MCX signed MoU with Singapore Diamond Exchange In Feb 2017, Multi Commodity Exchange of India (MCX) and Singapore Diamond Investment Exchange (SDiX), the world s first and only commodity exchange trading in physically settled diamonds, have signed a Memorandum of Understanding (MoU) for establishing areas of cooperation between the two exchanges. The MoU is intended to facilitate cooperation between the two exchanges in areas such as knowledge sharing and research, standardization of the product for Indian markets and enhancing transparency in pricing, as well as to explore areas for further collaboration between the exchanges. MCX Version 2.0; Recommend BUY with TP of Rs 1505 We expect MCX to post robust 41% EBITDA CAGR driven by revenue CAGR of 25% and EBITDA margin expansion (48% in FY19E vs. 32.6% in FY16) over FY16-19E. Considering the asset-light nature of the business, we expect RoE to expand to 15% in FY19E vs. 9.0% in FY16. MCX had a decent run up after the hike in transaction charges and regulatory approvals (options trading). MCX currently trades at 46.5x FY17E and 35.2x FY18E EPS. We still see significant value in MCX considering its (1) Strong business franchise, (2) Recent top-level management rationalisation, (3) Favorable regulatory environment and (4) Long term growth prospects. Since, Stock has run up a lot, we recommend investors to BUY on MCX on declines to Rs with target price of Rs 1505 implying a P/E of 38x FY19E EPS. Key Risks Competition from other exchanges (universal exchange) Regulatory delays Higher regulatory risks due to speculative nature of trades: i) Delay in implementation of proposed policy measures; ii) Ban on trading in certain commodities; iii) Revision in open position limits, higher margin requirement, CTT imposition etc. Significant dependence on a few commodities: Top four commodities gold, silver, crude oil and copper accounted for more than 85% of total volumes on MCX Long term pricing pressure likely in commodities futures Private Client Group - PCG RESEARCH P a g e 3

4 Quarterly Financials Snapshot (Rs mn) Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Operating income Software service expenses Employee Expenses Other Operating Expenses EBITDA Interest Cost 0 0 NM Depreciation Other Income PBT Tax APAT E/o gains (adj for tax) 0-56 NM 0 NM RPAT Financial Summary (Standalone) Year Ending March (Rs Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) FY15 FY16 FY17E FY18E FY19E mn) Net Revenues ,225 2,349 2,832 3,556 4,478 EBITDA ,528 2,147 APAT ,251 1,085 1,418 1,624 2,021 Diluted EPS (Rs) P/B (x) P/E (x) EV / EBITDA (x) RoE (%) Private Client Group - PCG RESEARCH P a g e 4

5 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 PCG RESEARCH India s Exchange Traded Commodity Derivatives (ETCD) Trading value (Rs tn) Composition of India s ETCD 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bullion Energy Base Metals Agri Market Share of Key Commodity Exchanges MCX NCDEX Others 100% 90% 80% 70% 60% 50% 40% 30% Private Client Group - PCG RESEARCH P a g e 5

6 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 PCG RESEARCH MCX: Quarterly Trading Value Analysis Trading value (Rs tn): LHS ADTV (Rs bn): RHS MCX s Traded Value: Sectoral Composition 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bullion Energy Base Metals Agri MCX: Market Share % FY12 FY13 FY14 FY15 FY16 9M FY17 Private Client Group - PCG RESEARCH P a g e 6

7 Valuation Global Exchanges Emerging markets Country M-Cap (US$ mn) Forward P/E (x) Forward P/B (x) EV/EBITDA (x) ROE (%) EPS growth (2-yr PEG 1-yr fwd 2-yr fwd CAGR) (x) 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd MCX (HDFC Sec estimates) India Bloomberg Consensus estimates BM&F Bovespa SA Brazil 10, Bursa Malaysia Bhd Malaysia 1, Bolsa Mexicana Mexico Multi Commodity Exchange India EM average Developed markets CME Group USA 39, Hong Kong Exchanges Hong Kong 29, Intercontinental Exchange USA 33, Deutsche Boerse Germany 15, Nasdaq OMX USA 11, Japan Exchange Group Japan 8, Singapore Exchange Singapore 5, ASX Australia 7, CBOE Holdings USA 6, Hellenic Exchanges Greece NZX Ltd New Zealand Developed markets average Global average Private Client Group - PCG RESEARCH P a g e 7

8 Income Statement (Standalone) YE March (Rs mn) FY15 FY16 FY17E FY18E FY19E Net Revenues (Rs mn) 2,225 2,349 2,832 3,556 4,478 Growth (%) (34.7) Software support charges Employee Expenses SG&A Expenses Other Operating Expenses EBITDA ,528 2,147 EBITDA Margin (%) EBITDA Growth (%) (39.9) (12.5) Depreciation EBIT ,210 1,819 Other Income (Including EO Items) 1, ,231 1, Interest PBT 1, ,970 2,248 2,815 Tax (Incl Deferred) Minority Interest RPAT 1, ,418 1,624 2,021 EO (Loss) / Profit (Net Of Tax) 0 (667) APAT 1,251 1,085 1,418 1,624 2,021 APAT Growth (%) (18.1) (13.2) Adjusted EPS (Rs) EPS Growth (%) (18.1) (13.2) Balance Sheet (Standalone) YE March (Rs mn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS Share Capital - Equity Reserves 11,512 11,529 12,190 12,955 13,927 Total Shareholders Funds 12,022 12,039 12,700 13,465 14,437 Settlement guarantee fund 1,871 1,879 1,973 2,072 2,175 Total Debt Net Deferred Taxes (Net) Long Term Provisions & Others TOTAL SOURCES OF FUNDS 14,236 14,201 14,955 15,819 16,894 APPLICATION OF FUNDS Net Block 1,451 1,401 1,352 3,489 3,384 Investments 132 2,230 2,230 2,229 2,230 LT Loans & Advances Total Non-current Assets 1,965 3,941 3,907 6,059 5,973 Debtors Other Current Assets ,137 1,415 Cash & Equivalents 15,385 13,448 14,510 13,870 15,845 Total Current Assets 16,278 14,227 15,482 15,074 17,345 Trading margin from members 2,389 2,473 2,865 3,667 4,693 Other Current Liabilities & Provns 1,617 1,495 1,569 1,648 1,730 Total Current Liabilities 4,007 3,967 4,435 5,315 6,423 Net Current Assets 12,271 10,260 11,048 9,760 10,922 TOTAL APPLICATION OF FUNDS 14,236 14,201 14,955 15,819 16,895 Private Client Group - PCG RESEARCH P a g e 8

9 Cash Flow (Standalone) YE March (Rs mn) FY15 FY16 FY17E FY18E FY19E Reported PBT 1, ,970 2,248 2,815 Non-operating & EO items (1,075) (927) (1,231) (1,038) (995) Interest expenses Depreciation Working Capital Change Tax Paid (409) (290) (552) (624) (793) OPERATING CASH FLOW ( a ) ,535 2,150 Capex (84) (202) (142) (2,453) (224) Free cash flow (FCF) (918) 1,926 Investments 1 (2,098) Non-operating Income ,231 1, INVESTING CASH FLOW ( b ) 227 (2,209) 1,089 (1,415) 772 Debt Issuance/(Repaid) Interest Expenses (14) (0) FCFE (918) 1,926 Share Capital Issuance Dividend (179) (614) (664) (760) (946) FINANCING CASH FLOW ( c ) (193) (614) (664) (760) (946) NET CASH FLOW (a+b+c) 731 (2,445) 1,061 (640) 1,975 EO Items, Others Closing Cash & Equivalents 15,385 13,448 14,510 13,870 15,845 Key Ratio (Standalone) FY15 FY16 FY17E FY18E FY19E PROFITABILITY (%) GPM EBITDA Margin APAT Margin RoE RoIC (or Core RoCE) RoCE EFFICIENCY Tax Rate (%) Fixed Asset Turnover (x) Debtors (days) Other Current Assets (days) Other Current Liab & Provns (days) Cash Conversion Cycle (days) (455) (353) (330) (303) (261) Debt/EBITDA (x) (15) (14) (13) (7) (5) Net D/E (x) (1) (1) (1) (1) (1) Interest Coverage (x) 124 3,941 NM NM NM PER SHARE DATA (Rs) EPS CEPS Dividend Book Value VALUATION P/E (x) P/BV (x) EV/EBITDA (x) OCF/EV (%) FCF/EV (%) (1.8) 3.8 FCFE/Mkt Cap (%) 0.1 (0.2) Dividend Yield (%) Private Client Group - PCG RESEARCH P a g e 9

10 Rating Chart R E T U R N HIGH MEDIUM LOW LOW MEDIUM HIGH RISK Ratings Explanation: RATING Risk - Return BEAR CASE BASE CASE BULL CASE IF RISKS MANIFEST BLUE PRICE CAN FALL 15% IF RISKS MANIFEST LOW RISK - LOW & IF INVESTMENT PRICE CAN FALL RETURN STOCKS RATIONALE 20% OR MORE FRUCTFIES PRICE CAN RISE BY 15% YELLOW RED MEDIUM RISK - HIGH RETURN STOCKS HIGH RISK - HIGH RETURN STOCKS IF RISKS MANIFEST PRICE CAN FALL 35% OR MORE IF RISKS MANIFEST PRICE CAN FALL 50% OR MORE IF RISKS MANIFEST PRICE CAN FALL 20% & IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 30% IF RISKS MANIFEST PRICE CAN FALL 30% & IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 30% IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 20% OR MORE IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 35% OR MORE IF INVESTMENT RATIONALE FRUCTFIES PRICE CAN RISE BY 50% OR MORE Private Client Group - PCG RESEARCH P a g e 10

11 Price Chart Rating Definition: Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year. Private Client Group - PCG RESEARCH P a g e 11

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HDFC Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai HDFC securities Limited, 4th Floor, Above HDFC Bank, Astral Tower, Nr. Mithakali 6 Road, Navrangpura, Ahmedabad , Gujarat. Website: pcg.advisory@hdfcsec.com Private Client Group - PCG RESEARCH P a g e 12