: price: EPS: Is commodity option a game changer for MCX? - Unlikely In the union budget 2015-16, the Finance Minister announced the much anticipated merger of SEBI and FMC. Given the powers accorded to SEBI, launching of Commodity Options and enabling FII to trade in Indian commodity exchanges could get easier. In this note we explore the impact Commodity Options could have on MCX. We believe commodity options market in India would be unlike other global markets. We are not changing our estimates, but increase our P/E multiple to 25x given higher comfort in our ADTV estimates. We retain our sell recommendation and caution investors that allowing only Commodity options and not allowing FII participation could impact transaction revenues adversely. Globally commodity options account for 20-30% of futures notional turnover. In markets such a LME it is very low at 3% In India we believe Commodity options would cannibalise futures trading and become the primary instrument if CTT is applied along the same principles of STT Analysis of NSE F&O trading pattern post change in application of STT for options trading from notional turnover to Option premium indicate a surge in options trading at the cost of futures. STT cost on trading is substantially lower in Options as STT is charged only on option premium, whereas in futures STT is charged on contract value. BSE announced its intention to launch commodity exchange that could be credible competitor given backing of Deutsche Borse and latest technology platform. We note that BSE has been able to garner 40% market share in currency derivatives in a period of 18 months. We believe MCX s would have to price options trading competitively as competition would offer it for free or at very low cost. BSE s pricing of Currency derivates is at 2% of NSE s price. Global exchanges such as CME / ICE charge on a per contract basis and not on option premium. Conversion of the charges to as percentage of option premium indicates 15 30 bps as trading cost in comparison to 2bps charged by NSE. We expect MCX pricing to be lower than other global exchanges. At 2 bps of trading cost MCX would need to have an ADTV of Rs. 640bn to make incremental transaction revenues of Rs. 500mn. Financial summary Date Mar 11, 2015 Market Data SENSEX 28710 Nifty 8712.05 Bloomberg Shares o/s Market Cap Stock performance (%) 1m 3m 12m MCX 42% 39% 132% Sensex 1% 3% 31% CNXIT 2% 12% 26% Year ADTV (Rs. bn) Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE(%) FY15E 223 2,493 1,020 1,213 23.9 50.3 51.5 10.3% FY16E 297 3,108 1,617 1,680 33.0 36.4 31.9 13.2% FY17E 402 3,916 2,173 2,196 43.1 27.8 23.2 15.9% MCX IN 51mn Rs. 62bn 52-wk High-Low Rs. 1,290-425 3m Avg. Daily Vol Rs. 990mn Index member Update Latest shareholding (%) Promoters 0.0 Institutions 56.3 Public 43.7 BSE Midcap SRIVATHSAN RAMACHANDRAN, CFA srivathsan@sparkcapital.in +91 44 4344 0039 AISHWARIYA KPL aishwariya@sparkcapital.in +91 44 4344 0040 Page 1
tional Turnover Revenue Indexed MCX Ltd. Analysis of NSE suggests options could become primary instrument Impact of STT on NSE volumes (First chart) and Turnover (Second chart) 40,000 30,000 2500 2000 1500 1000 500 0 STT was introduced for both cash and derivative markets for stock exchanges in 2004. Futures were charged higher than the cash, to encourage investors to hold stocks for long term. Options volumes were weak till 2008 due to higher costs (Option cost + STT) as taxes on both futures and options were charged on notional principal STT got introduced in Oct.2004 In 2008, STT on options contracts were reduced by changing the tax base from notional value of option contract to option premium.. of option contracts on NSE increased significantly (186%) in 2008 and has been on a exponential growth since then, way higher than future growth. Today, India has one of the highest index option trading Index Options volume increased ~300% in 2008 with change in STT in options 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Single stock futures Stock index futures Stock options Stock index options Source: Company, Spark Capital Despite the sharp rise in Options Volume and Turnover.. it still contributes ~ 45% of F&O revenues of NSE 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% FY08 FY09 FY10 FY11 FY12 FY13 0% FY08 FY09 FY10 FY11 FY12 FY13 Futures Options Futures Options Source: NSE, Spark Capital Source: NSE, Spark Capital Page 2
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 v-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 v-14 Dec-14 Jan-15 As % of notional turnover MCX Ltd. In Global exchanges options account only for small portion of turnover Global Exchanges Options account for 5 30% of total turnover in exchanges such as CME / ICE / LME Moreover most volumes are only in near month contract only with low market depth for other month contracts Exchanges charge on per contract basis for F&O trades in both equity and commodity markets unlike in India. In India exchange transactions are on Contract Value or Option premium. NSE s option pricing is Rs. 200 per million for stock option premium and Rs. 3 per million for currency option premium. Transaction charges in options across global exchanges Specifications US$/ COMEX/NYMEX Cost per contract per side Gold Options 100 Troy ounces 2.2 Silver Options 5,000 Troy ounces 2.2 Copper Options 25,000 Pounds 1.8 Brent Crude Oil Options 1,000 Barrels 1.0 Natural Gas Weekly 4 Options 10,000 MMBtu 1.0 LME - Per leg/ per side/ per lot Futures, Carries, Traded options and TAPOs 0.9 ICE Per contract Gold / Silver options 100 / 5000 troy ounces 0.6 Energy options 1.3 Assumed as for square off trades for a member Globally options continue to be low as % of notional turnover (options & futures) 30% 20% 10% 0% CME ICE Futures US LME Source: Bloomberg, Spark Capital Research Page 3
Financial Summary Financial summary - standalone FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E Profit & Loss account Cash flow s Revenues 3,197 2,273 2,864 3,643 Cash from operating 385 1,663 1,866 2,848 Other Operating Income 209 220 244 273 Cash from investing 527 1,042 1,065 1,233 Total income 3,407 2,493 3,108 3,916 Cash from financing -1,133-439 -609-1,061 Softw are support charge 622 408 438 518 Free cash flow 326 1,623 1,806 2,788 Contribution to SGF 171 31 37 125 Key metrics Others 1,499 1,284 1,210 1,265 Turnover (Rs. bn) 86,543 58,301 78,227 1,05,307 EBITDA 1,457 1,020 1,617 2,173 Agg. Charges 1.76 1.84 1.75 1.67 EBIT 1,114 770 1,423 2,008 Transaction revenues 3,053 2,144 2,736 3,515 Interest expense 11 15 - - Ratios(%) Interest income 993 936 976 1,129 Revenue grow th -35% -27% 25% 26% PBT 2,096 1,691 2,399 3,137 PAT grow th -49% -21% 38% 31% Taxes 569 478 720 941 EBIT margins (%) 33% 31% 46% 51% PAT 1,528 1,213 1,680 2,196 PAT margins (%) 45% 49% 54% 56% Diluted EPS 30.1 23.9 33.0 43.1 ROE 13% 10% 13% 16% Balance sheet ROCE 9% 6% 9% 11% Share capital 510 510 510 510 ROIC 27% 20% 39% 71% Reserves & surplus 10,931 11,704 12,775 13,910 Valuation metrics SGF 1,720 1,898 2,083 2,373 O.shares (mn) 51 51 51 51 Other long term liabilities 449 449 449 449 Diluted shares 51 51 51 51 Total 13,610 14,561 15,818 17,242 Market cap 60,819 61,010 61,112 61,112 Net fixed assets 1,735 1,531 1,397 1,292 EV 52,493 52,507 51,593 50,365 Other long term assets 413 413 413 413 P/E (x) 39.8x 50.3x 36.4x 27.8x Cash and equivalents 14,183 16,449 18,771 21,791 EV/EBITDA (x) 36.0x 51.5x 31.9x 23.2x Current assets 15,267 17,549 20,019 23,362 EV/Sales (x) 15.4x 21.1x 16.6x 12.9x Margin deposits 2,585 3,656 4,566 6,006 P/BV (x) 5.3x 5.0x 4.6x 4.2x Current liabilities 3,805 4,926 6,006 7,819 DPS 10 7 10 17 Total 13,610 14,561 15,818 17,242 Earning yield 2.5% 2.0% 2.7% 3.6% Page 4
Financial Summary 1800 MCX 1600 1400 1200 1000 800 600 400 200 0 1-Jan-12 1-Jul-12 1-Jan-13 1-Jul-13 1-Jan-14 1-Jul-14 1-Jan-15 Historical Report Date (Rs.) TP (Rs.) Recommendation 16/Feb/15 860 860 Reduce 18/v/14 871 760 Sell 30/Sep/14 816 720 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% -10% over a 1-year horizon Stock expected to fall >10% 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. Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. 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Cont d Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of interest statement Analyst financial interest in the company Group/directors ownership of the subject company covered Investment banking relationship with the company covered Spark Capital s ownership/any other financial interest in the company covered Associates of Spark Capital s ownership more than 1% in the company covered Any other material conflict of interest at the time of publishing the research report Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services products or services other than those above in connection with research report Whether Research Analyst has served as an officer, director or employee of the subject company covered Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; MCX Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Decker and Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Decker and Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker and Co. All responsibility for the distribution of this report by Decker and Co, LLC in the US shall be borne by Decker and Co, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker and Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker and Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations; Page 7