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Buy MCX, target price Rs 1,400: Motilal Oswal

Over FY21-22, the brokerage expects strong revenue growth of 14-18 per cent and stable EBITDA margin of 42-44 per cent, notwithstanding the Covid-19 impact.

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Last Updated: Apr 01, 2020, 01.23 PM IST
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Motilal Oswal has a buy rating on Multi Commodity Exchange of India (MCX) with a target price of Rs 1,400 (an upside of 24 per cent over the CMP of Rs 1,131).

Total value of contracts traded on MCX increased strongly by ~44 per cent YoY in the fourth quarter of FY20. This was significantly ahead of the brokerage’s earlier estimate and largely led by heightened uncertainty and volatility in the global markets. Gold/silver/crude reported strong growth of ~120 per cent/133 per cent/60 per cent year-on-year (YoY) in traded value. Against the backdrop of Covid-19 outbreak, trading at MCX was truncated to eight hours (against 14 hours earlier), making it out of sync with the global commodity markets. This led to a sharp ~80 per cent drop in traded value. In its base case, the brokerage expects the restrictions to continue till end-Apil 2020.
The share price moved down by -7.94 per cent from its previous close of Rs 1124.25. The last traded price is Rs 1035. Incorporated in 2002, MCX has a market cap of Rs 5765.37 crore.

Investment Rationale

Over FY21-22, the brokerage expects strong revenue growth of 14-18 per cent and stable EBITDA margin of 42-44 per cent, notwithstanding the Covid-19 impact on first quarter of FY21 operations. It has upgraded the company’s EPS estimate by 5-7 per cent over FY21-22 to factor in the increase in volumes led by global market volatility. The brokerage likes the company for its near monopoly in the commodity exchanges segment in India. Over the course of its listed history, one-year forward P/E multiples has averaged ~25 times. The target price implies 25 times FY22E EPS.

Recent volatility in global markets further underscores the need for diversification into alternate assets like gold and silver. Cues from the GFC period hint at an increased interest in precious metals over a 2-3 year period following the crisis/ market volatility.

Over the previous two months, growth in traded value in crude decelerated (67 per cent/87 per cent/24 per cent in Jan/Feb/Mar YoY). This was largely driven by the sharp decline in crude prices over this period. Normalization of margin requirements should drive continued strength in crude volume growth on MCX.

Despite the one-off near-term impact on 1QFY21E (0 per cent YoY revenue growth), a strong ~14 per cent/18 per cent revenue growth over FY21/22 is expected, primarily led by precious metals and crude. Notwithstanding the sharp EBITDA margin contraction expected in 1QFY21 (33 per cent v/s 49 per cent in 4QFY20E), the brokerages expects the EBITDA margins over the next two years to remain largely stable (in the range of ~42 per cent-44 per cent).

Financials

For the quarter ended December 31, 2019, the company 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 same quarter sales of Rs 76.93 crore. The company reported net profit after tax of Rs 55.31 crore in the latest quarter.
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