Recent weakness a good entry point in MCX stock

While Q4 performance was muted, presence of structural growth drivers can help sustain stock valuations

Weak volumes, coupled with higher operating expenses, impacted the results of the MCX (Multi Commodity Exchange of India) for the March 2017 quarter (Q4). Falling volumes of precious metals, both gold and silver, thanks to continued subdued activity in the physical market after the note ban, led to a sharp 10 per cent sequential dip in the MCX’s volumes in the quarter. Higher realisations after the recent price hike in transaction charges, however, enabled the MCX to post a consolidated income of ~57 crore, which, though down 9.5 per cent sequentially, was in line with analyst expectations. Higher expenses on regulatory fees and investments in GIFT city pushed up the company’s operating expenses, which, in turn, squeezed the EBIT (earnings before interest and taxation) margin to a measly 5.2 per cent as compared to 15.1 per cent in the preceding quarter. On top of all this, a higher tax rate too impacted the consolidated net profit, which fell 36 per cent sequentially to ~22 crore, way below the expectation of ~30 crore. In this backdrop, it is not surprising that the MCX stock fell as much as 4 per cent in Friday’s early trade.

The management believes volume growth could recover in the next couple of quarters. The introduction of the goods and services tax (GST) in July and the uncertainty around it could have some bearing on the MCX’s trading volumes in the near term. Analysts at ICICI Securities expect the company to post 13 per cent volume growth this fiscal year, lower than the 18 per cent increase expected earlier but still a healthy figure.

Though the regulators have given the nod to commodity options, the company is still awaiting final guidelines on this and, once implemented, this could act as another catalyst for the MCX’s volume growth in the long run. This process, however, will be a gradual one. On the flip side, as the regulators grant the ‘universal exchange’ licence to some of the leading stock exchanges, the MCX could witness heightened competition by the end of this fiscal year or thereabouts. While it remains to be seen how the competitive scenario pans out then, the MCX’s leadership position as well as the successful track record in the commodity segment so far lends comfort.

At current levels, the MCX stock trades at 37 times the FY18 estimated earnings, which are higher than its threeyear average one-year forward price to earnings ratio of 25 times. However, expectations of healthy revenue as well as earnings growth of 30 per cent and 40 per cent, respectively, and significant scope to scale up the business are a few factors that will continue to support these premium valuations.

In this backdrop, most analysts remain positive on the stock and their average target price of ~1,425 indicates upside potential of 25 per cent from current levels.