Regulatory tailwinds may reverse MCX's poor show, spur price discovery

Stock yet to reward investors; volatility in sales, profit numbers have been pain points

Commodity trading has witnessed a number of changes in India. From being a select investor group’s domain, it has now opened up for all. Trading volumes, product categories, and trading interest, too, have been rising steadily. Yet, a lot of these don’t reflect in the financials of Multi Commodity Exchange (MCX) — India’s largest commodity trading platform — which is a monopoly in the segment. Trading at Rs 765 apiece, the stock has been a laggard for those who had invested during its initial public offering (IPO) by betting on its long-term potential.

For one, revenue and net profit have been quite volatile, and this has historically been a pain point. Though average daily traded volumes have risen from Rs 18,200 crore in April 2017 to Rs 25,800 in January 2019, the climb wasn’t steady and therefore resulted in high cost structure, contributing to earnings volatility. For instance, after a prolonged weakness since FY15, the financials of MCX saw some improvement in FY17, though net profit once again declined 16 per cent year-on-year (YoY) in FY18.

The ongoing financial year, though, offers some hope. After a watershed June 2018 quarter, the subsequent quarters have been positive. A large part of the gains has, however, come through treasury income (Rs 32 crore). Without this, the December quarter (Q3) would have witnessed flat net profit growth sequentially. In absolute terms, Q3 has turned out to be the best in recent times, with net profit rising 124 per cent YoY to Rs 42 crore, on the back of a 22 per cent YoY revenue growth.

With the markets regulator now allowing mutual funds and portfolio management services to participate in exchange-traded services — besides select alternate investment services — the Street hopes this will lead to improved qualitative participation and help arrest the earnings volatility.

Analysts at ICICI Securities say institutional participation will provide liquidity, especially to the far-month contracts, which are currently absent in the market. “It will strengthen the price discovery mechanism and make risk management more cost-effective, by lowering the impact cost of trade,” they add.

Consequently, they expect MCX to clock 25 per cent YoY earnings growth in FY19 and 18 per cent in FY20. Trading at 20 times its FY20 earnings, valuations are attractive. However, the March quarter results will be crucial to see if regulatory changes yield the desired gains.