Mumbai, September 3rd, 2024 – In their latest company update on the Multi Commodity Exchange of India (MCX), ICICI Securities maintained their HOLD rating on the stock, despite raising earnings estimates for FY25E and FY26E by 14.8% and 22.7% respectively. The brokerage set a target price of INR 5,348, representing a 4% upside from the current market price of INR 5,166. The upward revision in earnings is primarily attributed to robust volume growth across options and futures trading, coupled with improved premium conversion rates in August 2024. However, ICICI Securities maintains a cautious stance due to limited visibility on future volume growth, which restricts further upgrades to the stock's valuation multiple.
Key Takeaways from the Report:
- Earnings upgrades for FY25E/FY26E driven by strong volume growth in options, futures, and premium conversion rates.
- HOLD rating maintained due to limited visibility on future volumes and no change in valuation multiple.
- Current valuations already factor in potential future volume growth, based on sensitivity analysis.
- Newly launched natural gas mini and crude oil mini contracts are yet to gain significant traction.
- Potential risks include regulatory changes impacting volumes and any issues with MCX's new software.
ICICI Securities highlights MCX's impressive performance in August 2024, with options ADTV surging 10.4% month-on-month, driven by strong traction in silver, crude oil, and natural gas. Futures ADTV also witnessed a 9.6% month-on-month increase. However, the report emphasizes that sustaining this momentum is crucial for further price appreciation. The brokerage's sensitivity analysis indicates that the current stock price implies demanding volume growth targets of ~38% for futures and ~76% for options between Q1FY25 and FY26E, even with a 35x FY26E P/E multiple.
The report also notes that MCX's new product launches – natural gas mini and crude oil mini contracts – have not yet gained significant traction. While these contracts hold potential, their success will depend on attracting broader market participation.
Looking ahead, ICICI Securities anticipates MCX's PAT to reach INR 5.2bn and INR 7.2bn in FY25E and FY26E respectively. This is based on projected futures ADTV of INR 275bn/INR 350bn and options ADTV of INR 2.1trn/INR 3.25trn in those years. The brokerage factors in potential regulatory changes impacting revenue streams, such as the removal of margin money on clearing and settlement funds and a revised charge structure for members.
Despite the positive developments in volume growth and earnings upgrades, ICICI Securities remains cautious due to the limited visibility on future volume trends, which are crucial for justifying a higher valuation multiple. The brokerage acknowledges potential upside risks from new product launches and increased participation, but also highlights the downside risk stemming from generic volume weakness and a potential reduction in option to future percentage rates.
Valuation:
ICICI Securities employs a 40x multiple on FY26E adjusted EPS (excluding software amortization cost and income from investments) and adds free cash and investments to arrive at the target price of INR 5,348.
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