“BUY” This Mid Cap Finance Stock For 33% Upside In 6 Months: HDFC Securities

HDFC Securities has declared a buy suggestion on the shares of Multi Commodity Exchange of India Ltd. (MCX). The brokerage has set a target price of Rs.2070 for the stock, which it expects to reach in six months from its current market price of Rs. 1554, representing a gain of around 33%. India's first listed exchange, the Multi Commodity Exchange of India Limited (MCX), is a digital commodity futures trading platform with a market share of 92.6 percent in FY 2021-22. (April-September).

Q2FY22 results of MCX

According to the brokerage's research report "MCX reported weak Q2FY22 numbers due to peak margin norms. Revenue was down by 30% YoY and 5% QoQ to Rs.832 mn. EBITDA margin stood at 40.6%, down 144bps QoQ, on account of declining revenue. Net profit dipped 44.2% YoY and 18% QoQ because of lower margins and other income. The company has started shifting its investments from tax-free bonds to ultra-short-term funds. This has impacted the other income during the quarter under review."

HDFC Securities has said in its research report that "The total traded value was at Rs.16.83trn (-5.1/-33.0% QoQ/YoY). ADTV declined sequentially for the fourth consecutive quarter (-8.0/- 33.0% QoQ/YoY). Bullion/metals/Agri ADTV was down -21.6/-18.0/-31.8 QoQ, while energy ADTV increased by +22.3% YoY. Active UCC was up 7/62% QoQ/YoY, indicating higher retail participation. MCX's market share in the commodity futures market stood at 92.6%. Average daily notional turnover of options contracts was increased by 422% to Rs.60.23 bn in Q2FY22 from Rs.11.53 bn in Q2FY21."

In its report, the brokerage has also claimed that "As stated in our last stock update report, the company has tied up with TCS for developing new software, which was expected to go live from September 2022. The shift to the new trading platform could result in cost savings, leading to a ~260bps margin tailwind in FY23E. Currently, technology costs are at 14-15% of transaction revenues."

Buy MCX With A Target Price of Rs. 2070

The brokerage has stated in its research report that "MCX has posted weak Q2FY22 numbers due to implementation of peak margin norms. However, we feel that volumes will start to improve going ahead. Volume recovery from the future segment and options volume growth trend, post the exchange has started charging transaction fees, will be the key things to watch out. We estimate 13% futures Average Daily Turnover (ADTV) CAGR over FY21-24E. A high-quality monopoly exchange with high structural growth and cyclical resilience deserves a higher multiple. The company has a high dividend payout ratio and we expect a dividend yield of 3.4% for FY24. Currently, the exchanges and depository stocks (platform companies) have become street favourites and are fetching high multiples."

According to HDFC Securities "We feel that MCX is still available at cheaper valuation compared to other such companies. MCX currently trades at 45.3x FY22E and 29.3x FY23E EPS. We believe that investors can buy MCX at an LTP of Rs. 1758 (27.5xCore EPS of Sep-23+ Cash) and add more at Rs.1591 (24.3xCore EPS of Sep-23+ Cash) for the base case fair value of Rs.1950 (31.2xCore EPS of Sep-23+ Cash) and for the bull case fair value of Rs.2070 (33.5xCore EPS of Sep-23 + Cash) over the next two quarters."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.