Fundamental View – MCX

Oct 19, 2013 No Comments by

 

 

MCX

Name – Multi Commodity Exchange

Sector – Trading

Market Cap – Rs 2200 Cr

Sales Turnover in June 2013– Rs 122 Cr

Profit in Jan-Mar 2013 – Rs 60.12 Cr

Company Profile

The Multi Commodity Exchange of India Limited (MCX), India’s first listed exchange, is a state-of-the-art, commodity futures exchange that facilitates online trading, and clearing and settlement of commodity futures transactions, thereby providing a platform for risk management. MCX offers trading in more than 30 commodity futures contracts across segments including bullion, ferrous and non-ferrous metals, energy, and agricultural commodities. 

Challenges

The Government recently announced a 0.01% Commodity Trading Tax (CTT) on all non agricultural commodities traded which will affect the total volume traded. The CTT amount can be exempted if the commodity trading is shown as a part of the balance sheet of the company.

In past few months the overall volume of trading had decreased due to the low volatility in the commodity prices. Also, the commodity market is not well developed like equity markets in India. Commodity future trading had been started in 2003 and still the volumes are very low as compared to other developed nations.

MCX has started listing equities also. In future it is expected to face stiff competition from other exchanges like NSE and BSE.

Positives

MCX is the market leader in commodity trading with 87.3% market share. The next exchange is NCDEX which holds less than 10% market share. Since 2003, the commodity derivate market has grown 85% year on year in turnover while MCX’s turnover has grown 200% year on year.

The exchange in its equity listing policy doesn’t levy any processing fees or initial listing fees. There is a very low listing fees on annual basis. This will encourage firms to get listed here. In November 2012, it had about 700 applications for listing even before going live. This was one of the highest applications for being listed on any exchange even before the exchange went live. At present, it has 270 applications which are being processed for being listed.

The companies which are exposed to commodity risk are willing to hedge their risk by holding positions in commodity futures. Also, investors are willing to make commodities a part of their portfolio. All these in future will lead to increase in volumes.

A total of about 30 commodities are being traded on the exchange. Recently it has added futures of Guar Seeds and Guar Gums. Globally MCX ranks 1st in Gold and Silver futures, 2nd in Copper and Natural Gas futures and 3rd in Crude Oil futures. Overall it is the 3rd largest commodity futures globally (as per number of contracts traded). The lot sizes of different commodities have been customized to suit the Indian standards. The huge volume provides enough liquidity to self discover the prices.

Only 15 % of the total gold traded in the country is traded through the exchange. In other developed countries this number is 75%-85%. This gives a huge opportunity for the exchange to tap in the gold market.

The company’s net profitability is 46%. So, for every Rs 100 as turnover it makes a profit of Rs 46. This is a huge profit margin for any kind of business.

Financial Technologies is a promoter of the company. So, in future it won’t have any problem in implementing any technological changes in its trading system. Currently its system is capable of supporting 10 million transactions per day but only 2million (maximum) contracts are being traded per day. So, it can ramp up the trading by 400% without any additional technology overheads.

It has tie ups with big exchanges like NYMEX, LME etc to use its price for settlement of contracts. This adds credibility to the prices of different commodities in MCX.

The stock has received a major hit due to the NSEL crisis. However, the MCX’s management has clarified several times that MCX and NSEL are totally different companies with no financial exposure to each other’s liabilities. The huge sell off has been due to the negative news flow regarding NSEL crisis. Yet there are positives for the company. The core business remains intact. In the past month we have seen huge buy interest in the stock with almost every alternate day upper circuit being hit. The controversial members like Jignesh Shah have been removed from the board. Also, SEBI has renewed the licence of MCX with a caution notice.

All in all the fundamentals look intact. The stock has recovered from sub 300 levels to 500 levels and in long term perspective we still see major upside due to the strength in the core business.

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