: 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 8586.25 Bloomberg MCX IN Shares o/s 51mn Market Cap Rs. 6bn 52-wk High-Low Rs. 1,29-482 3m 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 1,512 1588 31.2 37.8 33.5 13% FY17E 393 3,842 2,88 2123 41.7 28.3 23.7 16% FY18E 551 5,15 3,89 2992 58.8 2. 15.6 2% SRIVATHSAN RAMACHANDRAN, CFA srivathsan@sparkcapital.in +91 44 4344 39 AISHWARIYA KPL aishwariya@sparkcapital.in +91 44 4344 4 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
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 12 1 8 6 4 2 Source: MCX India, Spark Capital Research Page 2
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 2 18 16 14 12 1 8 6 4 2 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 279,868 297,442-6% 392,763 41,936-2% 25 2 15 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 31.2 33-6% 41.7 43.1-3% All figures in Rs. mn, except EPS, which is in Rs. Source: Bloomberg / Spark Capital One year forward PE Average Page 3
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 385 31 1,857 2,652 Other Operating Income 29 22 244 273 Cash from investing 527 1,42 1,36 1,211 Total income 3,47 2,26 2,95 3,842 Cash from financing -1,133-394 -575-1,26 Softw are support charge 622 383 422 51 Free cash flow 326 27 1,797 2,592 Contribution to SGF 171 - - 145 Key metrics Others 1,499 1,284 1,21 1,265 Turnover (Rs. bn) 86,543 51,837 73,65 1,2,94 EBITDA 1,457 843 1,512 2,88 Agg. Charges 1.76 1.84 1.75 1.67 EBIT 1,114 592 1,318 1,922 Transaction revenues 3,53 1,911 2,578 3,441 Interest expense 11 15 - - Ratios(%) Interest income 993 936 95 1,111 Revenue grow th -35% -34% 31% 3% PBT 2,96 1,513 2,268 3,34 PAT grow th -49% -29% 46% 34% Taxes 569 425 68 91 EBIT margins (%) 33% 26% 45% 5% PAT 1,528 1,88 1,588 2,123 PAT margins (%) 45% 48% 54% 55% Diluted EPS 3.1 21.4 31.2 41.7 ROE 13% 9% 13% 16% Balance sheet ROCE 9% 5% 8% 11% Share capital 51 51 51 51 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) 51 51 51 51 Other long term liabilities 449 449 449 449 Diluted shares 51 51 51 51 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 413 413 413 413 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 1 6 9 17 Total 13,61 14,451 15,69 17,11 Earning yield 2.6% 1.8% 2.6% 3.5% Page 4
Financial Summary 18 16 14 12 1 8 6 4 2 1-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/15 86 86 Reduce 18/v/14 871 76 Sell 3/Sep/14 816 72 Sell Page 5
Disclaimer Absolute Interpretation BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon Stock expected to provide returns of <5% -1% over a 1-year horizon Stock expected to fall >1% over a 1-year horizon Spark Disclaimer Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. 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