This Small Cap Financial Services Stock Grew 24.12% In 3 Months, Buy For Robust Gains, Says ICICI Securities

In a recent report, leading brokerage firm ICICI Securities rated Multi Commodity Exchange of India Limited (MCX) Buy and set a revised target price of Rs 1795/share. If you purchase the stock today at the present market price, the brokerage believes that the potential upside from its current level is 14%. It is a small cap company having a market cap of Rs 8,031.73 crore.

Volume rise in options has been the consistent investment thesis for Multi Commodity Exchange of India (MCX). Options ADTV rose sharply from Rs198bn in Q1FY23 to Rs313bn in Q2FY23. The same in Oct'22 / Nov'22 inched up further to Rs315bn / Rs413bn. Futures ADTV remained range-bound during the same period declining from Rs255bn in Q1FY23 to Rs238bn in Q2FY23 and rising to Rs260bn in Nov'2.

Stock outlook & Returns

The MCX's stock opened today at Rs 1,561/share, currently trading at Rs 1,586.30/share, 1.67% up as compared to its previous close on the NSE. The stock recorded its 52 week high at Rs 1,833.95 on 15 December 2021, and the 52-week low at Rs 1,143 on 16 May 2022, respectively. 
The shares in a week, moved up by 1.13%, while in a month, it moved up by 2.89%. In 3 months, the shares moved up by 24.12%. However, in the past 1 year, the shares have fallen 2.66%. In the last three years, it gave 38.79% positive returns and in the past 5 years, it gave 66.12% positive returns.

Composition of options volumes

MCX reported an Options ADTV of Rs413bn, up 31% MoM, in Nov'22. Gold / silver ADTVs grew 156% / 139% MoM while natural gas / crude oil grew 48% / 20%. On FY23-TD basis, crude oil / natural gas contributions continue to be high at 74% / 20% while gold / silver option volumes account for 4.2% / 1.2% of overall volumes.

Composition of futures volumes

MCX futures ADTV grew 11% MoM to Rs262bn driven by strong growth in silver and energy ADTV. Silver ADTV grew 19% while the same for crude / natural gas grew 16% / 18% MoM. Increase in futures ADTV was volume-driven. On FY23-TD basis, natural gas and silver are contributing 25% each to overall volumes while gold / crude oil / base metals are contributing 18% / 16% / 15.8% respectively.

Dec'22-end readiness to migrate to new software platform is critical

In Q2FY23, management sounded confident of transition to new software by the end of Q3FY23. User acceptance testing (UAT) had started for the new commodity derivatives platform (CDP). However, the cost of extension with 63 Moons has been exorbitant and management has indicated that the cost will be very high and will impact Q3FY23 results.

Maintain BUY for target price of Rs 1,795/share

ICICI Securities said, "Our estimates factor-in upgrade in FY24E ADTV estimates for both Futures and Options. We now factor FY23E / FY24E futures ADTV of Rs260bn / Rs280bn (H1FY22: Rs242bn, Nov'22 Rs260bn) and options ADTV of Rs295bn / Rs400bn (H1FY22: Rs355bn, Nov'22: Rs413bn). Accordingly, we estimate total revenues of Rs4.6bn / Rs5.2bn in FY23E / FY24E. We expect total operating expenses of Rs2.4bn in FY23E taking into account the Rs200mn additional one-time expense towards software (our estimate) due to extension of contract with 63 Moons. Our total operating expenses estimate for FY24E stands at Rs2.3bn (includes advantage of lower software costs). Accordingly, we estimate EBITDA margin of 46% / 56% in FY23E / FY24E respectively. We expect core PAT of Rs2.3bn in FY24 (CAGR of 27% between FY22-FY24E driven by lower software costs). Maintain BUY with a target price of Rs1,795 (earlier: Rs1,700) based on 35x FY24E core EPS of Rs46 and free cash of Rs184 per share."

Key risks: Sudden drop in overall volumes with decline in prices of key commodities (e.g. crude oil), and elevated software expenses

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.