The Compass: Structural growth drivers in place for MCX

Apart from rise in transaction charges, it will gain from a nod to launch new products

The Multi Commodity Exchange of India (MCX) has been surrounded with a host of positive newsflow in recent times. It stands to gain from introduction of new products such as commodity options, announced by the Securities and Exchange Board of India (Sebi) on Wednesday. The actual launch of these products will still take time, as detailed guidelines are awaited and MCX is required to take Sebi nod before introducing these products.

Also, MCX on Tuesday raised transaction charges for non-agri commodities by 25 per cent. “This will increase MCX’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 and earnings estimate for FY17 and FY18 by seven-eight per cent and 16-19 per cent, respectively.

It is not surprising that the stock hit a 52-week high of ~1,262 on Wednesday. In fact, MCX has outperformed the BSE Sensex, with 31 per cent rise in the past year versus a 10 per cent increase in the benchmark.

Introduction of commodity options and participation of institutions in the commodities markets will act as key catalysts for higher volumes at MCX, and could lead to a shift of customers to the organised market. Even without these, the management was confident of growing its volumes by 10-15 per cent (versus 8.7 per cent in FY16). Currently, the 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 MCX’s return on equity ratio from 7.8 per cent in FY16 to 11.8 per cent in FY18, estimate IIFL analysts.

Listing of the National Stock Exchange could lead to better price discovery and further aid MCX's valuations, believe analysts. The same though is still some time away. However, after the 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 and profitability. However, given it continued leadership position with a value market share of 84 per cent, it is well poised to defend its position.

As reported in media, any stake sale to Chicago Mercantile Exchange would also act as a key stock price trigger.