Buy MCX; target of Rs 1300: Motilal Oswal

Motilal Oswal's research report on MCX

Post demonetization, a series of problems has kept a revival in bullion at bay – gold volumes have declined 47% and silver volumes have declined 31% in the last 12 months. However, there has been a strong volume uptick in base metals. The recently-launched options constitute 5% of total gold volumes; MCX expects ~20% contribution towards the end of FY18. A basket approval on the rest of the eligible contracts can be expected soon, as clearing and settlement on the first expiry has been seamless. MCX would begin charging on options once it has more commodities covered and once participation reaches a satisfactory level. While there are triggers in the form of new products and higher participation, threat also exists from increased competitive intensity on the Universal Exchange License proposition. Current SEBI criteria for the launch of options protect MCX; any relaxation would reverse the situation and pose additional risks.

Outlook

From 4QFY18, options on all commodities will also be launched, a key trigger for volumes. This should kickstart the recovery in volumes, which should continue with the entry of new participants such as FIs and new products such as indices. This drives our expectation of healthier revenue growth over FY17-20 (18%) and consequently driving earnings growth (22%). Our price target of INR1,300 discounts forward earnings by 30x, implying ~40% upside. Buy.