Buy MCX India; target of Rs 1440: Motilal Oswal

Motilal Oswal is bullish on Multi Commodity Exchange of India (MCX) and has recommended buy rating on the stock with a target price of Rs 1440 in its September 12, 2012 research report.

“Multi Commodity Exchange of India Limited (MCX) is a state-of-the-art electronic commodity futures exchange, offering futures trading in over 47 commodities, mainly including Gold, Silver, Copper and Crude Oil. It began operations in November 2003, and has over 86% share (as at 31 March 2012) of the Indian commodity futures market. In terms of contracts traded in CY11, it is the thirdlargest globally, second-largest in Gold, largest in Silver, second-largest in Natural Gas, and third-largest in crude oil.”

“MCX has held on to its market leadership position, with a share of 82-87% over FY09-12. Supply of technology platform by its parent, Financial Technologies India (FTECH), one of the leading developers of exchange related software and technology, gives MCX a competitive edge that is difficult to replicate. If and when commodity exchanges in India receive regulatory approval to trade in new products like options, MCX will be able to quickly latch on to the opportunity, having invested significant resources to ensure readiness for the same. Additionally, new revenue sources like market data products and information offerings will lend scalability.”

“MCX's volumes have grown at a CAGR of 47% over FY07-12. With the industry nascent, and growth potential significant from multiple triggers, we expect sustained double digit volume growth over the medium-to-long term, notwithstanding impact from phases of low volatility. We expect volume CAGR of 15% and PAT CAGR of 13% over FY12-15. Also, the RoE should sustain at the high 20's. The company's decision to maintain its payout ratio at 50% too is a key valuation positive, and will support high multiples.”

“We value the standalone commodity exchange business at 20x FY14E earnings, in line with the average multiple for global peers in emerging markets, despite MCX's better competitive positioning and higher growth potential. This translates into a value of Rs 1330/share for the standalone commodity exchange business. We value MCX-SX at RS14b, 11x the potential revenues of RS1.3b in FY14 (transactions in FY10 had valued MCX-SX at RS45b). MCX's share in MCX-SX (including warrants) contributes additional RS110/share to its valuation. Our target price is Rs 1440. Buy for 23% upside,” says Motilal Oswal research report.

FIIs holding more than 30% in Indian cos

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