MCX Ltd. Rating: Target price: EPS: Tepid volume growth continues. Target. Rating CMP. Rs. 1,080 SELL. Rs. 1,176

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1 : price: EPS: Tepid volume growth continues 4QFY15 traded volumes in MCX showed a small improvement sequentially whereas declined yoy. FY15 traded Values are at a sever year low. We retain our cautious view on MCX, given a number of unknown factors such as cannibalisation from options, impact of new entrants such as BSE s commodity exchange and and expensive valuation. We note that MCX trades 2x FY18E EPS even after factoring a 2.5x increase in revenues over next three years making the most expensive listed exchange. Retain with price target of Volumes: In 4QFY15 traded value in MCX increased by 4% qoq and declined 5% yoy. 4Q continued to see an upward movement in ADTV with 4QFY15 ADTV recording a 8% increase sequentially. FY15 recorded six year low in total traded value and eight year low in number of contracts traded. We note that inspite of drop in volumes MCX continues to maintain its market share within the commodity trading market. Globally also volumes are showing uptick as evident in trade volumes of CME and NYMEX. Interestingly traded volumes have not declined in global exchanges as it has been with MCX Impact of new entrant: News articles suggest that Deutsche Boerse would be one of the partner in BSE s commodity exchange. Entrant of new player when critical changes are underway for the commodity market could disrupt the market for a while. BSE would have the advantage of Deutsche Boerse platform and could adopt aggressive pricing. For Ex. BSE adopted a zero pricing at the time of launch of Currency Derivatives and was able to garner substantial market share away from NSE. w even after moving to a token charge BSE is able to retain its ~4%+ market share. BSE adopting a similar predatory strategy could impact MCX transaction revenues in the next two to three years. Further partnership with Deutsche Boerse could provide a head start given existing relationship with a number of FII s on their existing Eurex Exchange. Valuations not factoring in risks: MCX s stock have rallies ~45% in last two months on the back of SEBI-FMC merger. We believe current valuation factor in flawless execution and regulations that enable new participants such as FII / Banks and also launch of options/ index trading. Our assumptions factor in 2.5x increase in transaction revenues resulting in an EPS CAGR of 4% over FY15-18E. MCX trades at 2x FY18E EPS making it the most expensive listed exchanges. We retain our Sell recommendation with a price target of Update Date Apr 6, 215 Market Data SENSEX 2826 Nifty Bloomberg MCX IN Shares o/s 51mn Market Cap Rs. 6bn 52-wk High-Low Rs. 1, m Avg. Daily Vol Rs. 1,6mn Index member BSE Midcap Latest shareholding (%) Promoters. Institutions 56.3 Public 43.7 Stock performance (%) 1m 3m 12m MCX -4% 38% 132% Sensex -4% 1% 25% CNXIT -6% 5% 26% Financial summary Year ADTV (Rs. bn) Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE(%) FY16E 28 2,95 1, % FY17E 393 3,842 2, % FY18E 551 5,15 3, % SRIVATHSAN RAMACHANDRAN, CFA srivathsan@sparkcapital.in AISHWARIYA KPL aishwariya@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

2 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Contracts Traded (Mn) Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Rs. Bn MCX Ltd. In Global exchanges options account only for small portion of turnover MCX Quarterly turnover has shown marginal sequential improvement over the last few quarters 6, 5, 4, 3, 2, 1, Source: MCX India, Spark Capital Research of contracts traded are also showing signs of improvement Source: MCX India, Spark Capital Research Page 2

3 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Contracts Traded (Mn) MCX Ltd. In Global exchanges options account only for small portion of turnover Trading activity has improved in last few quarters in CME also Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Source: CME, WFE, Spark Capital Research Key estimate revision Futures Contract Options Contract MCX forward P/E FY16E FY17E 3 Old New Change Old New Change ADTV Rs. Mn 279, ,442-6% 392,763 41,936-2% Revenues 2,95 3,18-5% 3,842 3,916-2% 1 EBITDA 1,512 1,617-6% 2,88 2,173-4% Margin % 51% 52% 54% 56% 5 PAT 1,588 1,68-6% 2,123 2,196-3% EPS % % All figures in Rs. mn, except EPS, which is in Rs. Source: Bloomberg / Spark Capital One year forward PE Average Page 3

4 Financial Summary Financial summary - standalone FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E Profit & Loss account Cash flow s Revenues 3,197 2,4 2,76 3,569 Cash from operating ,857 2,652 Other Operating Income Cash from investing 527 1,42 1,36 1,211 Total income 3,47 2,26 2,95 3,842 Cash from financing -1, ,26 Softw are support charge Free cash flow ,797 2,592 Contribution to SGF Key metrics Others 1,499 1,284 1,21 1,265 Turnover (Rs. bn) 86,543 51,837 73,65 1,2,94 EBITDA 1, ,512 2,88 Agg. Charges EBIT 1, ,318 1,922 Transaction revenues 3,53 1,911 2,578 3,441 Interest expense Ratios(%) Interest income ,111 Revenue grow th -35% -34% 31% 3% PBT 2,96 1,513 2,268 3,34 PAT grow th -49% -29% 46% 34% Taxes EBIT margins (%) 33% 26% 45% 5% PAT 1,528 1,88 1,588 2,123 PAT margins (%) 45% 48% 54% 55% Diluted EPS ROE 13% 9% 13% 16% Balance sheet ROCE 9% 5% 8% 11% Share capital ROIC 27% 15% 26% 45% Reserves & surplus 1,931 11,625 12,637 13,734 Valuation metrics SGF 1,72 1,866 2,13 2,317 O.shares (mn) Other long term liabilities Diluted shares Total 13,61 14,451 15,69 17,11 Market cap 59,74 59,891 59,992 59,992 Net fixed assets 1,735 1,531 1,397 1,292 EV 51,378 51,389 5,598 49,423 Other long term assets P/E (x) 39.1x 55.x 37.8x 28.3x Cash and equivalents 14,183 15,141 17,459 2,296 EV/EBITDA (x) 35.3x 61.x 33.5x 23.7x Current assets 15,267 15,942 18,445 21,574 EV/Sales (x) 15.1x 22.7x 17.2x 12.9x Margin deposits 2,585 2,55 3,52 4,787 P/BV (x) 5.2x 4.9x 4.6x 4.2x Current liabilities 3,85 3,43 4,64 6,263 DPS Total 13,61 14,451 15,69 17,11 Earning yield 2.6% 1.8% 2.6% 3.5% Page 4

5 Financial Summary Jan-12 1-Jul-12 1-Jan-13 1-Jul-13 1-Jan-14 1-Jul-14 1-Jan-15 MCX Historical Report Date (Rs.) TP (Rs.) Recommendation 11/Mar/15 1,2 1,8 Sell 16/Feb/ Reduce 18/v/ Sell 3/Sep/ Sell Page 5

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