Equity Research

July 1, 2013 BSE Sensex: 19577

INDIA

Multi Commodity Exchange of India

Slow start to Q1FY14; watch out for CTT
Mid-Cap
Target price Rs1,047 Shareholding pattern
Promoters Institutional Investors MFs and UTI FIs/Banks FIIs Foreign Corporate Bodies Others Source: BSE, NSE Sep 12 26.0 56.5 3.0 19.7 11.2 22.6 17.6 Dec 12 26.0 57.0 2.7 19.6 13.1 22.6 16.0 Mar 13 26.0 58.2 2.2 18.6 17.2 20.2 15.8

BUY
Maintained

Rs784

Reason for report: Company update

The Multi Commodity Exchange of India (MCX) witnessed a 1% MoM drop and a 9% YoY drop in its turnover in June 2013. While the impact of the Commodities Transaction Tax (CTT), which comes into effect on July 1, 2013, on MCXs turnover remains to be largely seen, we have factored in a 15% lower turnover for MCX in FY14 due to CTT. Turnover in Q1FY14 was up 3% YoY. f Silver in worse shape than gold: Bullion turnover declined 8% MoM and 24% YoY primarily due to weakening prices. Silvers 30-day volatility was way higher than that of gold, but a sharper slide in silvers price level affected its turnover and kept the overall bullion turnover in check. f Quarterly trend positive: MCXs Q1FY14 turnover was 4% higher than that of Q4FY12 and 3% higher than that of Q1FY13. As shown in table 2, in Q1FY14, silver and copper suffered a setback in turnover, whereas gold, crude oil and natural gas reported significantly higher turnover. f CTT Wait and watch: From July 1, 2013, the CTT proposed in the Union Budget will be operationally implemented. While CTTs impact on MCXs turnover remains to be seen, we have factored in a 15% lower turnover for MCX in our FY14 EPS. f Maintain BUY with target price of Rs1,047: We maintain BUY on MCX and value it at 18.0x FY15 PER and also believe any CTT-led price correction should create a further buying opportunity. Our target price is Rs1,047/share while the DCF-based value comes to Rs985/share. Currently, the stock is trading at a PER of 16.9x for FY14E and 13.6x for FY15E.

Price chart
1,650 1,400

(Rs)

1,150 900

Jul-12 Sep-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13

650

f Risks: Revenue decline due to lower trading volumes or continually declining commodity prices or both, possibility of intense volatility in commodity prices inviting regulatory intervention, larger-than-estimated impact of CTT and concentration risk arising out of large share of bullion in overall turnover. Table 1: Price and volatility trend
Silver Gold Crude Oil Copper Natural Gas Source: Bloomberg Market Cap Reuters/Bloomberg Shares Outstanding (mn) 52-week Range (Rs) Free Float (%) MCX Futures Price (Rs) Jun-2013 May-2013 Jun-2012 40,208 43,616 51,987 25,669 26,874 29,665 5,763 5,273 4,695 407 413 429 215 228 156 30-day avg. volatility (%) Jun-2013 May-2013 Jun-2012 31.8 18.4 20.2 21.4 15.5 13.2 18.4 22.7 29.7 14.3 25.5 19.7 30.5 33.8 58.9

Rs29.9bn/US$502mn MCX.BO/ MCX IN 51.2 1597/753 74.0 20.2 5,632 (10.8) (25.2) 2.8 12.5

Year to Mar (Cons) Revenue (Rs mn) Rec. Net Income (Rs mn) Rec. EPS (Rs) % Chg YoY P/E (x) CEPS (Rs) EV/E (x) Dividend Yield (%) RoCE (%) RoE (%)

FY12 5,262 3,009 59.3 72.1 13.2 64.6 8.2 3.1 23.4 32.6

FY13E 5,039 2,923 57.6 (2.9) 13.6 63.6 8.4 3.2 17.6 27.3

FY14E 4,323 2,359 46.5 (19.3) 16.9 52.8 10.9 2.5 11.3 19.6

FY15E 5,232 2,917 57.5 23.7 13.6 64.2 7.3 3.2 13.8 21.9

Nimit Shah
nimit.shah@icicisecurities.com +91 22 6637 7588

FII (%) Daily Volume (US$/'000) Absolute Return 3m (%) Absolute Return 12m (%) Sensex Return 3m (%) Sensex Return 12m (%)

Jeetendra Khatri
jeetendra.khatri@icicisecurities.com +91 22 6637 7416

Please refer to important disclosures at the end of this report

Multi Commodity Exchange of India, July 1, 2013 Table 2: Turnover trend for June
All Commodities Silver Gold Crude Oil Copper Natural Gas Source: Company % MoM (1) (11) (6) 19 (3) (27)

ICICI Securities
% YoY (9) (41) (6) 13 (20) 50 Fiscal YTD (%) 3 (25) 15 20 (22) 126

Chart 1: Turnover trend of all commodities

16 14.4 14 13.3 12.412.6 13.2 12.1 13.3 13.0 12.212.0 12.2 11.7 10.9

Chart 2: Turnover trend of silver

5 4 3 2 1 0 3.8 3.2 3.1 4.5 3.8 3.3 3.4 3.3 2.6 3.4 2.5 2.3 2.7

(Rs tn)

10 8 6

Oct-12

(Rs tn)

12

Oct-12

Apr-13

Nov-12

Nov-12

Aug-12

Sep-12

Dec-12

Aug-12

Sep-12

Dec-12

Jun-12

Jan-13

Jun-12

Jun-13

Jan-13

Apr-13

May-13

Source: Company

Chart 3: Turnover trend of gold

4 3.7 3.3 3 2.7 2.8 3.5 3.7 3.7 3.4 3.0 3.3 3.0 2.7 3.5

Chart 4: Turnover trend of crude oil

4 3.2 3.3 3 2.7 2.7 2.8 2.6 2.4 2.2 2.2 2.3 2.1 2.5 3.0

(Rs tn)

(Rs tn)

Oct-12

Oct-12

Apr-13

Aug-12

Sep-12

Nov-12

Dec-12

Aug-12

Sep-12

Nov-12

Dec-12

Jun-12

Jan-13

Jun-12

Jun-13

Jan-13

Apr-13

May-13

Source: Company

May-13

Mar-13

Mar-13

Feb-13

Feb-13

Jun-13

Jul-12

Jul-12

May-13

Mar-13

Mar-13

Feb-13

Feb-13

Jun-13

Jul-12

Jul-12

Multi Commodity Exchange of India, July 1, 2013 Chart 5: Turnover trend of copper
2.0 1.5 1.5 1.3 1.3 1.3 1.0 1.1 1.0 0.9 1.0 1.0 1.0 1.2 1.2 1.2 1.0

ICICI Securities
Chart 6: Turnover trend of natural gas
1.5 1.1 0.9 0.7 0.5 0.5 0.4 0.5 0.7 0.7 0.6 0.6 0.6 0.8 0.6

(Rs tn)

0.5

(Rs tn)
0.0

Oct-12

Oct-12

Apr-13

Aug-12

Sep-12

Dec-12

Aug-12

Sep-12

Nov-12

Nov-12

Dec-12

Jun-12

Jan-13

Jun-12

Jun-13

Jan-13

Apr-13

May-13

Chart 7: Share of all commodities in turnover

Silver 3 11 20 4 10 26 5 10 26 3 9 19 25 27 29 22 31 Gold 5 8 23 Crude Oil 4 8 19 5 7 19 Copper 6 8 17 5 8 19 Natural Gas 8 9 19 8 9 18 6 10 21 5 10 25

28

23

25

26

26

25

25

28

30

29

22

26

25

29

29

27

27

24

25

21

19

Nov-12

Jun-12

Jan-13

Source: Company

May-13

Feb-13

Mar-13

Aug-12

Sep-12

Dec-12

Jun-13

Jul-12

Oct-12

Apr-13

May-13

Mar-13

Mar-13

Feb-13

Feb-13

Jun-13

Jul-12

Jul-12

0.0

Multi Commodity Exchange of India, July 1, 2013

ICICI Securities

Risks
Sudden price declines may reduce fees
Transaction charges, which form around 95% of the companys revenues, are charged on the traded value of commodity contracts and not on their volumes. Hence, in the event of continually declining commodity prices, transaction charges (based on the traded values of contracts) and thereby revenues would correspondingly go down.

Intense commodity volatility may invite regulatory intervention

Since the commodity market is dominated by individuals / speculators, it can witness intense volatility. This could attract intervention by the regulator, which can impact the volumes at the exchange. However, as most of the commodities traded at MCX have international linkage, the threat stands mitigated.

CTT impact can be larger than estimated

The impact of CTT on the turnover of MCX could be larger than our current assumption.

Concentration risk
MCXs turnover has largely been concentrated in bullion and energy. A sharp decline in bullion and energy volumes or a sudden decline in market share can affect the companys revenues in the near term.

Multi Commodity Exchange of India, July 1, 2013

ICICI Securities

Financial summary (Consolidated)

Table 3: Profit & Loss statement
(Rs mn, year ending March 31) FY12 Gross Turnover Excise Duty Revenue from operations 5,262 Other operational income Total Income 5,262 Operating Expenses 1,915 EBITDA 3,347 % margins 63.6 Depreciation & Amortisation 272 Net Interest 0.1 Other Income 1,031 Recurring PBT 4,105 Add: Extraordinaries (142) Less: Taxes - Current tax 1,101 - Deferred tax (4) Less: Minority Interest & Share in associates 2 Net Income (Reported) 2,867 Source: Company data, I-Sec research FY13E FY14E FY15E

Table 6: Cashflow statement

(Rs mn, year ending March 31) FY12 FY13E Operating Cash flow post tax 2,350 2,134 Working Capital Changes 1,160 529 Capital Commitments (2,925) 847 Free Cash Flow 585 3,510 Cash flow from Investing Activities Issue of Share Capital 0 Buyback of shares Inc (Dec) in Borrowings Dividend paid (296) (1,471) Interest paid (0) Chg. in Cash & Bank balance 289 2,039 Source: Company data, I-Sec research FY14E 1,593 (1,153) 788 1,227 FY15E 2,092 1,544 867 4,503

5,039 5,039 2,025 3,014 59.8 306 1,324 4,032 1,109 2,923

4,323 4,323 2,009 2,314 53.5 322 1,330 3,322 963 2,359

5,232 5,232 2,205 3,027 57.9 342 1,424 4,109 1,192 2,917

(1,187) 41

(1,468) 3,036

Table 7: Key ratios

(Year ending March 31) FY12 FY13E FY14E FY15E Per Share Data (Rs) EPS(Basic Recurring) Diluted Recurring EPS Recurring Cash EPS Dividend per share (DPS) Book Value per share (BV) Growth Ratios (%) Operating Income EBITDA Recurring Net Income Diluted Recurring EPS Diluted Recurring CEPS Valuation Ratios P/E P/BV EV / EBITDA EV / EBIT EV / Op. FCF (pre -Capex) Operating Ratios Software support charge / Revenue Employee charge / Revenue Effective Tax Rate (%) Current ratio 56.5 59.3 64.6 24.1 197 57.6 57.6 63.6 24.8 225 46.5 46.5 52.8 20.0 248 57.5 57.5 64.2 24.7 277

Table 4: Balance sheet

(Rs mn, year ending March 31) FY12 Assets Total Current Assets of which cash & cash eqv. Total Current Liabilities & Provisions Net Current Assets Investments of which Strategic/Group Others Net Fixed Assets of which intangibles Capital Work-in-Progress Goodwill Total Assets 5,380 3,124 8,640 (3,259) 11,511 2,155 9,356 1,877 507 1 10,129 FY13E 7,617 5,163 9,367 (1,749) 11,511 2,155 9,356 1,819 607 11,581 FY14E 7,538 5,204 8,094 (555) 11,511 2,155 9,356 1,797 707 12,753 FY15E 10,599 8,240 9,662 936 11,511 2,155 9,356 1,756 807 14,203

67.1 74.5 73.6 72.1 64.3

(1.8) (9.9) (2.9) (2.9) (1.6)

(17.6) (23.2) (19.3) (19.3) (17.0)

23.7 30.8 23.7 23.7 21.6

13.2 8.2 8.9 7.8 13.2

13.6 8.4 9.3 9.5 13.6

16.9 10.9 12.7 57.4 16.9

13.6 7.3 8.3 6.1 13.6

Liabilities Borrowings Deferred Tax Liability 151 Minority Interest Equity Share Capital 508 Face Value per share (Rs) 10 Reserves & Surplus 9,470 Net Worth 9,978 Total Liabilities 10,129 Source: Company data, I-Sec research

151 508 10 10,923 11,430 11,581

151 508 10 12,095 12,602 12,753

151 508 10 13,544 14,052 14,203

14.4 5.3 26.7 1.2

15.3 6.0 27.5 1.1

17.4 6.0 29.0 1.3

16.5 5.6 29.0 1.1

Table 5: Quarterly trends

(Rs mn, year ending March 31) Jun-12 Total Income 1,230 % growth (YoY) 5 EBITDA 756 Margin (%) 61.5 Other income 233 Add: Extraordinaries Net profit 647 Source: Company data, I-Sec research Sep-12 1,310 Dec-12 1,246 Mar-13 1,207

Profitability Ratios (%) EBITDA Margins 63.6 Rec. Net Income Margins 47.8 RoCE 23.4 RoNW 32.6 Dividend Payout Ratio 47 Dividend Yield 2.8 Source: Company data, I-Sec research

59.8 45.9 17.6 27.3 50 2.9

53.5 41.7 11.3 19.6 50 2.3

57.9 43.8 13.8 21.9 50 2.9

(16)
817 62.4 338 814

(4)

(3)

723 58.0 372 759

637 52.8 484 766

Multi Commodity Exchange of India, July 1, 2013

ICICI Securities

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ANALYST CERTIFICATION
We /I, Nimit Shah, CA and Jeetendra Khatri, BMS; research analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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