A slew of positive developments, such as clearance of the Forward Contracts Regulation Act (FCRA) Bill and Securities and Exchange Board of India’s (Sebi) approval for providing trading platform for other assets like equity to MCX-SX has led its share price to an all-time high. While the FCRA Bill will have to be cleared by parliament after which it will come into force, the improvement in market sentiments, particularly in the commodities space, has also helped. Analysts believe though there could be some pressure on the share prices in the near term given the huge run-up, investors with a long-term perspective should remain invested in the company (new ones could consider it on dips).
Following its listing in March at a 34 per cent premium to the initial public offering price, MCX’s shares dipped to almost Rs 850 levels. However, they have recovered to the current Rs 1,402. At the current market price, the stock is trading at 19 times its estimated FY14 earnings, which analysts consider reasonable in the light of its leadership in the commodity market, growth prospects in the business and higher return on equity.
What has changed?
MCX, the dominant player in the growing Indian commodity market with a share of about 85 per cent, has witnessed several positive changes in the last couple of months. The FCRA Bill clearance is positive as it will allow the exchange to further broadbase its products, such as introduction of options trading, which could lead to significant addition to its volumes in the coming years. To put it in perspective, globally options volumes account for almost 50 per cent of the total turnover of exchanges. This suggests good potential for development of the options market in India and, thus, higher volumes. Further, the Bill supports the participation of institutional investors like banks, mutual funds and insurance companies in commodity futures, which is positive as this will help boost growth in the business of the exchange. “We believe the implementation of the FCRA is key to further enhance volumes for the exchange and if it is implemented that could alone add about 20-30 per cent to current valuations of MCX,” says Amit Jain, who is tracking the company at Sunidhi Securities & Finance.
| GOOD GAINS IN FY14 | |||
| In Rs cr | FY12 | FY13E | FY14E |
| Revenues | 526.2 | 579.1 | 683.3 |
| OPM (%) | 63.6 | 64.2 | 65.9 |
| Net profit | 286.7 | 324.2 | 383.3 |
| EPS (Rs) | 56.2 | 63.6 | 75.2 |
| PE (x) | 25.5 | 22.5 | 19.0 |
| RoE (%) | 32.6 | 29.9 | 30.1 |
| E: Estimates RoE is return on equity Source: India Infoline | |||
Possible value unlocking
Another positive trigger could be the commencement of operations at MCX-SX. Recently, MCX-SX got Sebi’s approval to offer trading in other asset classes, such as equities. MCX-SX is currently operating in the currency segment and has seen continuous improvement in the business with average daily turnover crossing Rs 12,927.83 crore in the June quarter, compared to just Rs 355 crore during its first month of operations.
The company now intends to enter into other segments, such as equity and equity futures and options, interest rate futures and wholesale debt segments. It is expected to start operations in the equity segment around Diwali. Though initially volumes might not pick up, there is a fair possibility of benefits accruing in the long run as the company leverages its technological advantage and reach (of the group). MCX-SX has presence across 700 towns and cities in India and about 750 members. MCX, the parent company, holds five per cent equity and another 32 per cent in the form of warrants in MCX-SX.