Hold Multi Commodity Exchange; target of Rs 975: Edelweiss

Edelweiss' research report on Multi Commodity Exchange

Multi Commodity Exchange’s (MCX) Q3FY18 earnings came below expectations, impacted by softer revenue momentum (transaction as well as investment income). Despite stable-to-rising commodity prices, FY18 YTD volumes have been modest—ADTV down 4% YoY to INR200bn (even on lower base). Also, option roll out has been gradual and institutional participation is awaited. Factoring slackened revenue momentum, we cut FY18E and FY19E EPS >25% and 15%, respectively. Moreover, advent of universal exchange norm challenges MCX’s monopoly, posing a risk to the premium multiple it commands. Hence, we cut target multiple to 25x (from 35x). While taking away liquidity from MCX will not be easy for new players, predatory pricing could limit its pricing power. Structural threats, notwithstanding, we forecast 40% EPS CAGR over FY18-20 factoring in the benefits of positive levers and low base.

Outlook
Despite the associated risks, the stock still trades at 23x FY20E EPS, thereby capping the upside. Hence, downgrade to ‘HOLD’ with revised TP of INR975 (earlier INR1,310).

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