28 September 2016
Update
| Sector:
Others
BSE SENSEX
28,293
S&P CNX
8,745
MCX
Buy
CMP: INR1,247
TP: INR1,400 (+12%)
SEBI okays introduction of options in commodities
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val. (INR m)
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
2016
MCX IN
51.0
1,262/726
25/38/21
63.6
1.0
229
100
The Securities and Exchange Board of India (SEBI) released a circular ratifying the
introduction of options in the commodities derivatives market. According to the
circular, exchanges willing to start trading options shall take prior SEBI approval.
That would be procedural for MCX, in our view. The circular does not mention
which commodities are allowed, nor does it indicate the date from when options
contracts can start trading. The SEBI will issue detailed guidelines in due course.
Key highlights
from
the circular:
2017E
2018E
Net Sales
EBITDA
Net Profit
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%
RoCE (%)
P/E (x)
P/BV (x)
2.1
0.6
0.4
23.4
-5.0
236.1
3.5
8.8
53.4
5.3
2.6
0.9
1.5
29.4
25.7
250.9
12.0
11.8
42.5
5.0
4.0
2.1
2.4
46.8
59.4
274.7
17.8
17.4
26.6
4.5
Shareholding pattern (%)
As On
Jun-16 Mar-16 Jun-15
Promoter
0
0
0
DII
40.6
41.6
40.9
FII
18.2
15.7
15.3
Others
41.2
42.8
43.9
FII Includes depository receipts
Stock Performance (1-year)
Multi Comm. Exc.
Sensex - Rebased
1,300
1,150
1,000
850
700
The only instrument currently available in the commodity derivatives market
is futures on individual commodities. Introduction of new commodity
derivatives products has been keenly discussed given its potential to drive
overall development of that market by attracting broad-based participation,
enhancing liquidity, facilitating hedging and bringing more depth to the
commodity derivatives market.
The SEBI has constituted a committee of experts – Commodity Derivatives
Advisory Committee (CDAC) – to advise it on matters concerning effective
regulation and development of the commodity derivatives market.
Recommendations made by the CDAC inter alia on the subject of introduction
of new products have been considered, and it has been decided that
commodity derivatives exchanges shall be permitted to introduce trading in
options.
Commodity derivatives exchanges willing to start trading in options contracts
shall take prior approval of the SEBI (detailed guidelines will be issued in due
course).
Introduction of options
is
sentimentally positive:
Introduction of options is one of
the critical reforms that would trigger growth of the commodity derivatives
market from both hedgers’ and speculators’ perspective. It was widely anticipated
to be introduced this fiscal, and the announcement as a result comes on expected
lines. Nonetheless, the fact that options contracts finally see light of day after
years of deliberation – first by the FMC and then the SEBI – is sentimentally
positive for MCX. The financial impact, as we mentioned earlier, may be one akin
to hockey stick, with cannibalization impact for a brief early period followed by
significant market growth driving earnings.
Volume reversal to pre-CTT levels is our base case:
MCX has retained its market
leadership position with a share of 80-90% over FY09-16, even in the most
turbulent of months of FY13-14, when the parent’s existence was in deep waters
on issues of fraud around National Spot Exchange. With the SEBI’s reforms
underway, our base case assumes a return to pre-commodities transaction tax
(CTT) average daily turnover of INR500b by end-FY18. This compares with current
ADT of INR250b. Our price target is INR1,400, which discounts forward earnings by
30x.
Buy.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531

MCX
Valuation and view
Market leadership in winner-takes-all business:
MCX has retained its market
leadership position with a share of 80-90% over FY09-16. Even in the most
turbulent of months of FY13-14 – when the parent’s existence was in deep
waters due to issues of fraud around National Spot Exchange – the exchange
managed to retain its share. Additionally, it had remained without a full-time
MD & CEO for a long time since May 2014, when Mr. Manoj Vaish resigned just
three months after joining. This is a reflection of the winner-takes-all nature of
the business model.
Monopoly share in multiple commodities takes care of concentration risk:
MCX’s golden run in terms of volumes came at the time of significant run-up in
gold and silver prices in FY12 and FY13. That was also perceived to be a risk,
given that the share of volumes from these two commodities had exceeded
70%. However, presence in multiple commodities helps avert the concentration
risk, and this was evidenced in FY15, when action in oil prices drove energy to
exceed gold as the largest traded commodity at MCX by value.
All eyes on reforms, as SEBI-FMC merger is complete:
SEBI’s merger with FMC
is now complete, paving the way for much-awaited reforms in the ecosystem.
The upside for MCX may yet be partly a function of reports around approvals to
competition and entry of a credible global exchange materializing. We do not
expect these at one-go or immediately, but rather in a gradual, phased manner
over the course of the next calendar year. In the interim, reports suggest that
competitive intensity may take a while given the regulatory norms. Meanwhile,
MCX could: [1] get a head start and [2] strengthen itself with investment from
CME.
Volume reversal to pre-CTT levels is our base case:
Our base case assumes a
return to pre-commodities transaction tax (CTT) average daily turnover of
INR500b by end-FY18. This compares with current ADT of INR250b.
Multiplier effect on operational earnings from operating leverage, Buy:
Given
the fixed nature of MCX’s cost base, increase in volumes would help improve its
EBITDA margin significantly. We assume FY18 to be the first full year with at
least one key reform and ADT returning to pre-CTT levels. We assume this to be
split equally between futures and options. That drives our EBITDA margin
estimate of 53% in FY18 and earnings estimate of INR47/share. Our price target
is INR1,400, which discounts forward earnings by 30x.
Introduction of new products like options/indices.
Introduction of new participants like banks/FIs.
High volatility in key commodities like bullion/crude.
Key triggers
Key risk – increased competition from equity exchanges
One of the implications of FMC’s merger with the SEBI is that stock exchanges will
be able to become universal exchanges, where equities, debt instruments and
currencies are traded under the same roof as commodity derivatives. Stock
exchanges already have depositories and clearing corporations that will cater to the
needs of commodity traders as well. If NSE enters the commodities segment, MCX
could see stiff competition, which may impair both market share and profit margins.
28 September 2016
2

MCX
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
3,689
28.4
1,918
52.0
247
1,671
0
784
0
2,455
727
29.6
0
1,728
1,728
-21.7
2012
5,262
42.6
3,347
63.6
272
3,075
0
1,027
-142
3,960
1,098
27.7
0
2,862
2,862
65.6
2013
4,992
-5.1
2,932
58.7
307
2,625
0
1,427
0
4,051
1,065
26.3
0
2,986
2,986
4.4
2014
3,197
-35.9
1,248
39.0
343
905
11
1,202
0
2,097
569
27.1
0
1,528
1,528
-48.8
2015
2,038
-36.3
689
33.8
259
430
14
1,285
0
1,701
450
26.5
0
1,251
1,251
-18.1
2016
2,135
4.8
553
25.9
246
307
0
1,191
-667
831
413
49.7
0
418
418
-66.6
2017E
2,629
23.1
947
36.0
198
749
(INR Million)
2018E
4,009
52.5
2,108
52.6
201
1,907
1
1,325
0
2,073
541
26.1
0
1,532
1,532
266.3
0
1,334
0
3,241
796
24.5
0
2,445
2,445
59.6
Y/E Mar
Share Capital
Reserves
Net Worth
Balance Sheet
2011
510
7,975
8,485
127
0
8,612
1,953
0
8,236
4,808
489
3,310
1,010
6,385
-1,577
8,612
2012
508
9,461
9,969
432
0
10,401
1,369
1
11,502
5,887
514
3,124
2,249
8,358
-2,471
10,401
2013
510
11,058
11,567
569
0
12,136
2,044
0
10,682
5,131
69
3,475
1,587
5,721
-590
12,136
2014
510
10,931
11,441
2,169
1,720
13,610
1,735
0
10,898
4,782
90
3,417
1,275
3,805
977
13,610
2015
510
11,512
12,022
2,214
1,871
14,236
1,552
0
12,927
3,764
107
2,655
1,002
4,007
-243
14,236
2016
510
11,529
12,039
2,162
1,879
14,201
3,528
0
8,643
5,997
42
5,003
952
3,967
2,030
14,201
2017E
510
12,288
12,798
2,162
1,879
14,959
3,550
0
8,643
7,570
144
5,972
1,453
(INR Million)
2018E
510
13,502
14,012
2,162
1,879
16,173
3,591
0
8,643
10,141
224
7,817
2,101
6,202
3,939
16,173
Debt
SGF
Total Capital Employed
Net Fixed Assets
Capital WIP
Investments
Current Assets
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Net Current Assets
Total Assets
MOSL Estimates
4,804
2,766
14,959
28 September 2016
3

MCX
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Fixed Asset Turnover (x)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2011
33.9
38.7
166.4
5.0
17.1
2012
56.1
61.4
195.5
24.0
50.0
2013
58.6
64.6
226.8
0.5
0.9
2014
30.0
36.9
225.4
10.2
39.0
2015
24.6
29.6
235.8
10.2
48.5
50.7
42.1
5.3
23.7
70.2
1.0
2016
23.4
13.0
236.1
0.0
0.0
53.4
95.7
5.3
23.5
91.0
0.0
2017E
29.4
33.2
250.9
15.3
61.8
42.5
37.5
5.0
18.8
54.1
1.5
2018E
46.8
50.7
274.7
20.4
51.7
26.6
24.6
4.5
11.8
23.2
1.9
22.4
16.7
0
27.0
48
0.0
31.0
24.8
0
31.2
36
0.0
27.7
26.5
0
27.3
5
0.0
13.3
12.8
0
18.1
10
0.0
10.7
10.4
0
11.4
19
0.0
3.5
8.8
0
11.7
7
0.0
12.0
11.8
0
13.9
20
0.0
17.8
17.4
0
19.0
20
0.0
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
MOSL Estimates
Cash Flow Statement
2011
1,918
248
1,080
-546
0
2,700
-286
2,414
-2,042
0
-2,328
0
0
0
232
232
604
2,700
3,304
2012
3,347
-650
1,160
-1,097
0
2,760
-200
2,561
-2,723
0
-2,923
0
0
0
-23
-24
-186
3,310
3,124
2013
2,932
319
-1,941
-782
0
529
-462
68
1,910
0
1,448
0
0
0
-2,134
-2,134
-156
3,124
2,968
2014
1,248
1,085
-1,565
-384
0
385
-59
325
586
0
527
0
0
0
-1,133
-1,133
-221
3,475
3,254
2015
689
0
503
-220
0
972
-9
963
-1,080
0
-1,089
0
0
0
0
0
-117
3,417
3,300
2016
553
0
22
-41
0
533
-200
333
5,367
0
5,167
0
0
-14
0
-14
5,687
2,655
8,342
2017E
947
-36
234
-153
0
992
-220
772
926
0
706
0
0
0
-733
-733
964
5,003
5,967
(INR Million)
2018E
2,108
-58
671
-425
0
2,295
-242
2,053
964
0
722
0
0
0
-1,173
-1,173
1,844
5,972
7,817
28 September 2016
4

MCX
NOTES
28 September 2016
5

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28 September 2016
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