Renewed interest in MCX shrs on hopes of equity trading

MCX shares have rallied nearly 22% in the last three weeks, since touching a low of Rs 860 in late May. The stock was quoting at Rs 1057 in early trade Monday, barely 2% above its issue price of Rs 1032 when it went public in February this year. The recent rally appears to have more to do with the regulatory changes which could help MCX launch its long-delayed equity trading platform through its arm MCX-SX. On Thursday, the Sebi announced rules for new stock exchanges, which among other things, gives promoters a deadline of three years to bring down their holding to 5%. The rule on promoter holding was at the heart of the dispute between MCX and Sebi, leading to a near 18-month legal tussle which culminated in April this year with the Supreme Court asking Sebi to amend its rules on public shareholding in stock exchanges.

After a strong showing in the first month after listing when they hit a peak of Rs 1426, MCX shares have been flagging. A bearish market is chiefly to blame, but investors appear a bit edgy about the traded turnover on the exchange in April and May, with the daily average below that in FY12. Low volatility in global commodity prices and a simultaneous weakness in the rupee is bad news for MCX. And while MCX's impending entry into the high margin equity trading should boost earnings, it could take a while for MCX to make a mark in that segment. Unlike in the commodities market where it had a first mover advantage, MCX will be up against the well-entrenched market leader NSE in the cash market. Besides, there is also BSE to contend with even if that bourse is not aggressive as it once used to be. Exchange business is all about liquidity, and traders and clients prefer the most liquid bourse, whatever the other incentives. That explains why the BSE is struggling to scale up its equity derivatives segment despite repeated attempts.

In 2009-10 when MCX was close to launching its equity platform (before it got into a wrangle with Sebi over the manner or reducing promoter holding to conform to the 5% limit), the company's management said that it was hopeful of building market share by offering lower transaction costs. But as brokers and officials at rival exchanges point out, fees charged by exchanges account for a very small portion of the total transaction cost. It is government taxes like stamp duty, securities transaction, and education cess that make up the lion's share of the transaction cost.

And while NSE still doesn't have any broker members on its board, it has become far more 'broker-friendly' since 2009 when MCX-SX's entry into equity trading looked inevitable. MCX-SX won't find the going easy in the equity trading segment, though NSE will be equally wary of a rival famed for its aggressive tactics.

Here is brokerage house Citi's take on MCX, on which it has a buy rating with a target of Rs 1580.

"MCX has a highly scalable business, high returns and strong execution track record, and it looks well positioned to benefit from the (commodity) industry's strong growth potential long-term.
We believe key catalysts for the stock could be: a) Continued high turnover growth (we believe 20-25% growth sustainable without regulatory opening up); b) Hike in dividend payout; c) Regulatory changes allowing new products (options, indices, intangibles) and participants (FIIs, domestic institutions) - though timing is uncertain; and d) Potential value unlocking from strategic stakes in DGCX, MCX-SX (we assume nil value currently)."