Add MCX, target price Rs 1,330: HDFC Securities

HDFC Securities has given an add rating to multi commodity exchange (MCX) with a target price of Rs 1,330.

According to the brokerage, MCX delivered healthy volume growth in the fourth quarter (+35.7 per cent year on year) and expanded market share by 240 bps to 94 per cent in FY20. After strong Q4, volume dropped significantly in April-20, due to reduction in exchange timings and a sharp drop in crude prices post the spread of Covid-19 pandemic. Volume recovery was witnessed in May-20, but it’s still 35 per cent below the Q4 level. Crude (45.4 per cent of vol. in FY20) is impacted due to the high margin requirement (100 per cent), extreme volatility, and negative settlement price. The brokerage does not see crude volume reaching the previous level in FY21E. Tailwinds like launch of Index futures and Institutional participation will aid volume recovery.

Investment Rationale

The brokerage says institutional volume uptick is possible with Deutsche, Orbis and Stock holding signing up as custodians. Index futures launch is expected in the near-term, subject to regulatory approval. Globally Institutions account for ~50 per cent of the total derivatives volume. MCX’s focus on improving the physical delivery mechanism and local price discovery for key commodities will create a franchise for long term sustainable growth. The brokerage estimates revenue/EBITDA/Core PAT CAGR of 10/18/15 per cent over FY20-22E. The stock trades at P/E of 34.5/26.8 FY21/22E EPS, which leaves limited upside on the table.

Financials

For the quarter ended December 31, 2019, the company has reported consolidated sales of Rs 89.27 crore, down -10.86 per cent from last quarter sales of Rs 100.15 crore and up 16.04 per cent from last year's same quarter sales of Rs 76.93 crore. The company reported net profit after tax of Rs 55.31 crore in the latest quarter.

Promoter/FII Holdings

FIIs held 32.58 per cent stake in the company as of March 31, 2020 while DIIs held 39.32 per cent and public and others 28.11 per cent.