1. NATVERLAL RESEARCH
M
Multi Commodity Exchange of India Ltd
ACCUMULATE
BSE Code 534091
NSE Code MCX
Bloomberg Code MCX:IN
Current Price 830
Target Price 860
Mcap ` bn 42.3
Mcap US mn 631.7
52 wk H/L 1214/726
Face Value 10
2 wk avg vol (000) 201
Financial Snapshot
` Mn FY15 FY16E FY17E
Net sales 2,225 2,354 2,818
% ch (34.7) 5.8 19.7
EBIDTA 1,977 1,893 2,273
%ch (39.9) (4.3) 20.1
PAT 1,258 513 1,433
%ch (17.9) (59.2) 179.3
EPS 24.7 10.1 28.1
BV 236.3 242.1 253.3
P/E 33.7 82.5 29.5
EV/EBIDTA 30.6 33.7 22.4
Shareholding Pattern
Sameer Dalal
Sameer@natverlal.com
91-22-42134444
Gaurav Singh
gaurav.singh@natverlal.com
91-22-42134421
Industry leader in huge growth opportunity industry
Multi Commodity Exchange of India Limited (MCX) is a commodity futures exchange that
facilitates online trading, clearing and settlement of commodities futures transactions
thereby providing a platform for risk management. The company operates under the
regulatory framework of SEBI. It offers trading in varied commodity futures contracts such
as energy, precious metals, non precious metals and agricultural commodities. It is the
market leader in the commodity exchange space.
Growth of overall economy: Indian economy is projected to grow at a steady 7.5 - 8% p.a
for the next three years by the international agencies like IMF and World Bank. The growth
of the Indian economy is expected to drive the underlying demand for commodities. The
increase in physical market volumes of commodities will increase the hedging
requirements of industry players, which influences derivative trading volumes.
Increased penetration in commodity exchanges: Commodity derivatives are generally a
multiple of the underlying physical commodity volumes. In India, the volumes traded on
commodity futures exchanges are very low as compared to the size of the physical market
for the commodity. Thus the potential for commodity derivatives is huge. As the market
becomes more organized we will see more players preferring to trade on the exchanges
where risks of counter party are much lower.
Leader in the industry: Although there is competition in the industry with multiple
exchanges for various products, MCX over the years has been the market leader with
almost 85% of the traded volumes on the legalized exchanges. Changing traders, hedger,
brokers, and investors between exchanges has always been a challenge as can be seen
from the equity stock exchanges of India. Based on this we believe they would be able to
maintain their overall market leadership.
Increased product portfolio: At present there is very limited number of products traded
on the exchange and if it were to be accounted almost 70% of the traded volumes can be
classified to 3-4 commodities. MCX over the past couple years has not been able to launch
any new products with new regulators and also certain issues with the ex-promoter group.
With these behind now we believe launching of new products will give a boost to overall
volumes. Further we could also see launch of options contracts within the existing
products which too could add to turnover helping growth.
Strong balance sheet could give opportunities for inorganic growth: MCX has a strong
balance sheet with surplus cash sitting in its balance sheet. Although this has been a big
drag on the returns, this balance sheet give them an opportunity to look at acquiring some
global commodity exchanges. If adjusted for this cash the return ratios are extremely good
for the core operations.
Valuations: At present MCX is trading at P/E multiple of 82.5x, 29.5x, 23.5x and EV/EBITDA
of 33.67x, 22.36x and 15.08x for FY16E, FY17E and FY18E respectively. At valuation
multiples look expensive as the volumes took hit with the introduction of CTT and litigation
issues. We believe an EV/EBIDTA multiple of 16x for FY18E is justifiable since 30% premium
to international peers seems reasonable. Based on this we recommend an ‘ACCUMULATE’
on correction.
FII 15.29
DII 40.39
Bodies
corporate
12.68
Others
0.66
Retail
30.98
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Tel. Board: 91-22-4213 4444 Dealing Rm: 91-22-4213 4400, 2265 1121 Fax : 91-22-4213 4440 Email : reasearch@natverlal.com

2. NATVERLAL RESEARCH MCX Ltd.
Investment Rationale:
Increased penetration in commodity exchanges: The growth in the physical
commodities volume will push the growth in the commodities futures exchange. The
proposed GST would hopefully integrate India’s commodity markets, making them more
efficient and paving the way for a national market for commodities. An efficient physical
market for commodities can act as a catalyst for faster and inclusive growth of the
corresponding derivatives market. In India the volume of the derivative contracts traded
on commodity exchange with respect to physical markets is low when compared to
global markets. Futures multiplier of a commodity refers to ratio in volumes in the
futures market to the size of physical market of that commodity. The chart below
compares the futures multiplier of MCX with that of the global benchmark exchange in
the respective commodities which clearly signals out the great untapped potential of the
company. The reason we believe this shift to the exchanges will happen over time are
listed below
Advantages of trading on an exchange:
• Standardized product- One of the biggest advantages of trading on a commodity
exchange is that exchange’s offers standardized contracts to traders in terms of
quality, grade and quantity. It eliminates the risk of manipulation on account of
purity, grade and quality for a contract to the participants. It provides security
and assurance to the traders in terms of what he is trading.
• Counter party guarantee- while executing any contract there is a risk involved
with default or cheating by either party. Risk management is a major benefit for
participants trading on exchange. When someone trades on an exchange they
are not taking a risk on a particular individual/company but on exchanges which
have a well structured settlement procedures and prudent risk management
practices. The exchanges in turn have ample collateral from both trading parties
in case of any default to ensure there is no loss to concerned party. India has had
its fair share of cheatings and defaults, as time lapses we will see people shifting
their demand to exchanges to avoid such circumstances.
• Cash settled contracts – Most contracts on the exchange at present are cash
settled, this ensures the limited risk of quality concerns when the actual goods
change hands. Although physical deliveries could rise over time, the exchange
will be able to get warehousing systems in place to ensure adequate quality
checks.
0
50
100
150
Gold Silver Copper Cotton
59
148
90
44
5
34
13 0.7
Futures Multiplier Comparison
Global Benchmark Index MCX
Natverlal Research
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3. NATVERLAL RESEARCH MCX Ltd.
• Transparency- An electronic trading platform helps in creating a transparent
price discovery mechanism on the commodities futures exchange without any
intervention by sellers and buyers. It is driven totally by market fundamentals
and the risk factor associated with manipulation is effectively negated.
• Help to farmer community: India is traditionally an agrarian economy and
fluctuation in prices during the harvesting period has always been a major
concern for the farmer community. Futures trading provide a greater degree of
assurance on the price front. Further, farmers go for distress selling during the
harvest time due to lack of storage facilities.
Industry leader will maintain its first mover advantage: MCX has a staggering 82.72% of
the market share as on December, FY15 in Indian commodity futures exchange. Further,
it has a complete monopoly that is 100% market share at present in the crude oil market
and base metals segment whereas almost 99% share in bullion space. Globally MCX
crude oil futures and MCX silver micro futures occupy the 12th
and 13th
most traded
commodity futures contracts. It is the first exchange in India to launch mini contracts to
cater to the needs of small traders and SMEs. It is also the first exchange in India to
initiate evening sessions to synchronize with trading hours of major international
markets. The chart on the left illustrates the market share of commodity exchanges in
India and also the market share of the company in individual commodity segment.
Over the years, with equity markets we have seen shifting of volumes from an exchange
to another is a very difficult task and requires a change in the whole system of trading for
the new exchange to benefit. A simple example of change was when the badla system in
the BSE was banned which gave rise to the NSE futures market. Post this BSE has been
trying for the past many years to generate volumes on their futures exchange but this
has been a moot point. In view of this I believe the first mover advantage that MCX has
in the commodity space will ensure they are able to stay ahead and keep their strong
market share and make most of the advantage with the growth in the future.
Increased product portfolio: Last few years has been challenging for the company
especially because of regulatory issues and de growth in the commodities futures
market. As a result the company was able to launch fewer products. Going forward, the
company would like to launch new products in a time bound manner primarily because
of new regulator SEBI. The increased product portfolio would give a boost to the
turnover of the company. Options trading too once introduced could lead to good
growth in the hedging which would increase the scope of the operations. Currently crude
oil, gold and silver constitute roughly about 75% of the turnover. Introduction of new
products would increase turnover and shift the focus of concentration of turnover to few
products. The chart on the left shows the market share in various segments it operates.
Increased market participants: With SEBI at the helm, institutions like FIIs, banks, mutual
funds may be allowed to enter the commodity futures market and as a result this will
increase the trade and turnover on the exchange. MCX being the market leader in
commodity derivative exchange will immensely benefit from this. At present with limited
participation from large institutions the growth of the industry has been in the hands of
the small traders and arbitragers. There is a keen interest from all large institutions to be
able to participate in this industry. Globally too all large institutions are permitted to
engage in the business and with them coming in volume growth could be quite
exceptional. The chart on the left shows the constituents of turnover.
MCX,
82.72
NCDEX,
16.82
Others,
0.46
Market Share
MCX NCDEX Others
0
20
40
60
80
100
Bullion Energy Base
Metals
Agri
98.88 100 100
9.53
Market Share in Key Segments
Energy
35.54
Precious
Metals
34.53
Non
Precious
Metals
27.78
Agri2.15
Turnover %
Natverlal Research
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4. NATVERLAL RESEARCH MCX Ltd.
FMC merger with SEBI: With this merger the Forward Contracts Regulation Act stands
repealed and the regulation of commodity derivatives markets shifts to SEBI under the
Securities Contracts Act (SCRA). SCRA is a stronger law and gives more powers to SEBI.
SEBI being a credible and trusted regulatory body has all necessary infrastructure to
regulate the commodities market and has a far superior surveillance, risk monitoring and
enforcement mechanism. This will give immense boost to the investors and brokers.
Impact of commodities transaction tax and subsequent reduced transaction cost:
Commodities transaction tax (CTT) was levied on exchange traded commodity
derivatives from July 1, 2013. At 0.01% of the transaction value, the levy would work out
to ` 10 on a deal worth `0.1mn. It increased the cost of doing transactions, this impaired
all participants but predominantly it affected the arbitrage trader’s efficiency and drove
them out. As a result the turnover declined since FY13. Ever since then there has been a
demand from the commodity exchanges to remove CTT which will bring in higher
volumes, reduced cost which will encourage more people to shift to exchanges rather
than bilateral deals. We have already discussed what the advantages of trading on an
exchange are and we believe as the understanding increases so will the volumes.
Transaction fees have been lowered: The company reduced transaction charges on
agricultural commodities by almost 70% at the end of FY14 and on non-agricultural by
16%. This led to a decline in the revenue per traded lot for MCX affecting the revenues
and profitability. Although rates are not the lowest in the industry the downside risks to
rates look limited. Additionally these low rates with high regulatory requirements act as
a barrier for entry for new players as they can’t use pricing as a tool to draw its
customers away. Additionally this move gave a second benefit of giving agricultural
commodities more access for the farm community and other participants in the
commodity market. This was an important step towards ‘market inclusion’. The below
chart shows the decline in turnover due to the impact of CTT and reduced transaction
cost. Now with this done we will see a turnaround and revenues from core operations
are set to rise as can be seen with the chart alongside. The chart on the left shows the
decline in the revenue from operations since FY13 to FY15 and the expected growth from
there onwards.
Strong balance sheet: MCX is currently sitting on a very large cash reserve, some of it will
be required in an investment of the clearing corporation of `3.0bn, but with no plans on
how to take that forward on a consolidated basis this would not have any change in
profitability. However having an excess of almost `7.0bn in additional funds we could
either see a good dividend payout over the years or some sort of inorganic growth if the
opportunity were to present. Either ways could be positive for investors.
Strong Return ratios on core business expected to only increase: One of the biggest
strengths of MCX has been its strong core operations earnings ability. If we were to
eliminate the excess cash being held the core operations of the company had generated
a RoCE of 17.5% which was much lower thanks to the cut in transaction fee and also
sharp reduction in volume post the introduction of CTT. Although the volume increase is
not dependent on the removal of CTT, the removal will lead to growth being much
faster. For MCX to earn higher the introduction of new products and new variants will
lead to higher volumes and that too without excessive investments which would ensure
the RoCE going forward would rise. We believe the core operations continue to remain
strong and will start contributing to a larger part of the net profits over the years which
in turn will drive up the RoE as well which has been languishing.
5,240
3,407
2,225 2,354
2,818
3,516
-
1,000
2,000
3,000
4,000
5,000
6,000
FY13 FY14 FY15 FY16E FY17E FY18E
Revenue from Operations
36.63
22.11
17.91 17.29
25.35
36.04
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
FY13 FY14 FY15 FY16E FY17E FY18E
ROCE
Natverlal Research
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5. NATVERLAL RESEARCH MCX Ltd.
Corporate restructuring: The contagion effect of the crisis hit National Spot Exchange
Limited (NSEL) caused some problems for MCX as the promoter group at the time was
the same. However once the FTIL group was declared unfit by the regulatory authority
to own exchanges they were made to sell and we now have new shareholders and a
professionally run company. Subsequent to this, a majority of the board has been
reconstituted. Now the new management will be able to focus on growing the business
rather than its earlier focus on fighting litigation.
Write offs affected profitability: The company held equity shares and warrants in
Metropolitan Stock Exchange of India Limited (MSEI) formerly MCX stock exchange. As
per SEBI guidelines MSEI was required to adjust its shareholding pattern so as to bring it
within the limits prescribed by it. Consequently several factors reduced the marketability
of MSEI warrants. Based on the market prices determined the company had to make a
provision of `594.0mn in the FY16. Although this is a one off with the impact of the loss
on warrants now done, we will see a good jump in the profitability going forward from
the low profit levels in the current financial year.
Natverlal Research
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6. NATVERLAL RESEARCH MCX Ltd.
Valuations:
At the current price if we look at the valuations of MCX the company does look very
richly valued as the stock trades at a P/E of 82.5x,29.5x and 23.5x a P/BV of 3.4x, 3.3x
and 3.1x and a EV/EBIDTA of 33.6x, 22.3x, and 15.0x FY16E, FY17E and FY18E
respectively. These valuations are after the commodity exchange volumes took a huge
hit post the introduction of CTT affecting the entire industry. Post that the promoter
group company faced legal hurdles as there was a default at NSEL which led to the old
promoters being declared unfit and we had a change in promoters. Yet after that the
regulatory body changed from the FMC to SEBI with the government announcing the
merger of the two. All of these led to company focusing on litigations and other details
which did not allow them to focus on launching too many new products we believe this
will change as discussed in our report.
MCX in the non-agricultural commodity market has got the lion’s share of the market
and has been struggling a little with agricultural where its competitor is the leader.
However this can change very quickly as MCX has a much larger broker base and launch
of some contracts could lead to volumes seeing an uptick in agri. Further there are
limited exchanges and this industry does have some entry barriers and will be difficult for
new players to make a large impact.
New contracts, new participants, new products will all lead to a big increase in volumes
which will lead to a big increase in the turnover and profitability. With limited need of
capital to be deployed, this will lead to the further improvement in the RoCE from core
operations which stand at 17.29%. The RoE of the company are where the struggle is as
these are much lower due to the high cash holdings at present. However these too will
rise as the overall contribution from the core business becomes a large part of the
overall profitability.
Looking at valuations of some international peers we believe MCX should trade at a
premium as the growth is expected to be far higher. We believe in the near term given
the massive growth upside a premium of 50% to EV/EBIDTA would be fair however that
is not a sustainable valuation multiple. In view of that we believe a 30% premium to
international commodity players is justifiable and based on that we arrive at an
EV/EBIDTA multiple of 16x for FY18E. The growth in volumes could be much larger than
our expectation as we have not taken addition of too many new commodities at this
time given the limited clarity with SEBI taking over. We will revise our guidance at a later
date with more clarity. Based on all work we see more reward for this company over the
longer term and hence we Initiate coverage on the company with a ‘ACCUMULATE’
rating with a near term target of `860 given limited upside from current price we believe
its best to add this stock on corrections. Although the upside looks capped in the near
term we believe the stock could be at much higher levels going forward and hence the
positive bias. The table below illustrates the growth and valuation multiples of
international peers with that of MCX.
Particulars MCX ICE CME
CAGR 16.48 15.80 7.19
P/E (FY18E) 23.5 11.04 19.9
EV/EBITDA (FY18E) 15.0 11.04 11.75
Natverlal Research
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7. NATVERLAL RESEARCH MCX Ltd.
Risk Management:
Escalating Competition: Although the company enjoys considerable market share,
competition from the other commodity exchanges has been on the rise in the last few
years. Further, plans of other prominent stock exchanges to start commodity exchange
would increase competition. MCX has been able to maintain a consistent market share
irrespective of the external circumstances. MCX has necessary approvals and
infrastructure to carry this momentum. It has reduced the cost of transaction in order to
reduce competition.
De growth in commodities sector: The ongoing structural slowdown in China has
depressed the demand for oil, iron ore and other commodities thereby dragging down
growth. The demand for commodities is unlikely to recover in near future. Although
efforts have been made by Indian government to increase its expenditure which may
have trickledown effect. Decrease in the commodity prices is hurting exports of primary
items such as cotton and iron ore from India. Low volume in the physical commodities
market would eventually impact trading on the commodities exchange.
Regulatory hindrances: With SEBI as the new regulatory and monitoring body, it may
impose reasonable restrictions on the launch of new products, regulatory and
infrastructure issues with respect to warehousing, delivery and settlement processes,
shareholding pattern. The company may have to go through stringent compliance
process.
Commodities Transaction Tax (CTT): Since the introduction of CTT on non agricultural
commodity futures, trading on commodities exchanges has reduced. As a result of this,
hedging cost has increased and liquidity has reduced. Large corporate have move their
hedging position to international exchange and traders have stopped trading.
Natverlal Research
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8. NATVERLAL RESEARCH MCX Ltd.
Financials
Profit & Loss Balance Sheet
In ` million FY15 FY16E FY17E FY18E In ` million FY15 FY16E FY17E FY18E
Net sales 2,225 2,354 2,818 3,516 Equity capital 510 510 510 510
YoY (%) (35) 6 20 25 Reserves 11,537 11,835 12,408 13,127
Total expenses 1,349 1,564 1,664 1,871 Minority Interst 0 0 0 0
EBIDTA 876 791 1,154 1,645 SGF 1,871 1,913 2,002 2,114
YoY (%) (39.9) (9.7) 45.9 42.6 Total Borrowings 0 0 0 0
EBIDTA (%) 39.4 33.6 40.9 46.8 Non current liabiliti 343 259 244 260
Other income 1,102 1,102 1,119 1,151 Current liabilities 4,007 3,757 3,787 3,854
PBIDT 1,977 1,893 2,273 2,796 Total Liabilities 18,268 18,275 18,951 19,864
Depreciation 259 297 310 336
PBIT 1,718 1,596 1,962 2,460 Net Assets 1,428 1,164 1,024 858
Interest 14 12 13 14 CWIP 0 150 150 150
Exceptional Item 0 651 0 0
PBT 1,704 933 1,949 2,446 Intangible assets 22.84 10.00 10.00 10.00
(-) Tax 450 420 517 648 Non current assets 454 372 397 422
Tax/ PBT 26 45 27 27 Current assets 16,363 16,579 17,371 18,425
Minority interest 0 0 0 0
PAT 1,254 513 1,433 1,798
YoY (%) (18.1) (59.1) 179.3 25.5 Total Assets 18,268 18,275 18,951 19,864
Cash Flow Key Ratios
In ` million FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
Net profit 1,258 513 1,433 1,798 EPS (Rs) 24.7 10.1 28.1 35.3
Depn and w/o 259 297 310 336 CEPS (Rs) 29.3 15.9 34.2 41.8
Deferred tax (25) 0 0 0 Book value (Rs) 236.3 242.1 253.3 267.4
Change in wrkg cap 470 (306) 63 11 DPS (Rs) 10.0 3.5 14.0 17.6
Other income 1,102 1,102 1,119 1,151 Debt-equity (x) 0.0 0.0 0.0 0.0
Operating cash flow 911 (598) 688 994 ROCE 17.9 17.3 25.4 36.0
Other income 1,102 1,102 1,119 1,151 ROE 10.4 4.2 11.1 13.2
Capex (52) (170) (170) (170)
Investments (2,036) (821) (700) (900)
Investing cash flow (986) 111 249 81 Valuations
Dividend (612) (215) (860) (1,079)
Equity 0 0 0 0 PE (x) 33.7 82.5 29.5 23.5
Debt 0 0 0 0 Cash PE (x) 28.4 52.3 24.3 19.8
Change in long term (13) 137 49 102 Price/book value (x) 3.5 3.4 3.3 3.1
Financing cash flow (625) (78) (811) (977) Market cap/sales 19.0 18.0 15.0 12.0
Others (61) (97) 0 0 EV/sales (x) 12.0 11.3 9.2 7.1
Net change in cash (762) (662) 126 98 EV/EBDITA (x) 30.6 33.7 22.4 15.1
Disclaimer
The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed
by our research team.
The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the information
contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try
and ensure accuracy of data however, Natverlal Research. And / or any of its affiliates and / or employees shall not be liable for loss or damage that may arise from any
error in this document. Natverlal Research and / or any of its affiliates and / or employees may or may not hold positions in any of the securities mentioned in the
document.
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Natverlal Reserach. Fairy Manor, 13 Rustom Sidhwa Marg Fort Mumbai 400001 Tel 91-22-42134444 Email research@natverlal.com
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