RESULT REVIEW 1QFY18 14 JULY 2017

Multi Commodity Exchange BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Unexiciting quarter, poised for growth MCX delivered poor performance in 1Q; revenue was down 5.5% QoQ to Rs 592mn, below our expectation of Rs 607mn. Drop in revenue was led by 3.4% fall in ADTV to Rs 188bn and 0.5% fall in realisation. Bullion (29% of ADTV), which was witnessing continued stress in trading volume post demonitisation, recovered 2.1% QoQ. Management expects ADTV to increase gradually after successful implementation of GST in July-17.

SEBI has approved Options trading and detailed CDAC guidelines have also been issued in June-17. Option trading will start by the end of 2Q, but initially only one contract (gold) will be allowed to trade. Ramp-up in option volume will happen gradually with launch of additional contracts in Dec-17. Options will start contributing meaningfully to top-line from 4QFY18.

MCX has maintained its dominant position with ~90% market share. We see value in MCX based on

(1) Embedded non-linearity, (2) Favorable regulatory environment, and (3) Super-normal growth prospects with start of options trading and new product launches (Indices). We estimate revenue/PAT CAGR of 15/16% for FY18/19E. Maintain BUY with TP of Rs 1,322 implying a P/E of 40x FY19E EPS.

Highlights of the quarter Bullion and energy recovers: Bullion/Energy ADTV

grew 2.1/1.6% QoQ while Metals/Agri ADTV fell by 10.2/26.4% QoQ. Metals saw a fall in 1Q due to GST.

EBITDA margin stood at 21.7% up 78bps QoQ due to drop in technology expenses and lower advertisement expenses.

Near term outlook: ADTV is expected to rise in 2Q led by bullion and metals. Options contribution will be negligible in 2Q and margins will expand gradually with growth in top-line. Any regulatory boost will lead to meaningful upside.

Financial Summary (Standalone) YE March (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) FY15 FY16 FY17 FY18E FY19E Net Revenues 592 630 -6.0 626 -5.5 2,225 2,349 2,594 2,878 3,444 EBITDA 129 222 -42.0 131 -1.9 876 767 797 959 1,351 APAT 263 328 -19.8 219 20.2 1,251 1,085 1,263 1,388 1,685 Diluted EPS (Rs) 5.2 6.4 -19.8 4.3 20.2 24.6 21.3 24.8 27.2 33.0 P/B (x) 4.6 4.6 4.0 3.9 3.7 P/E (x) 43.8 50.7 43.6 39.6 32.6 EV / EBITDA (x) 48.0 57.4 57.2 46.9 32.8 RoE (%) 10.7 9.0 9.9 10.0 11.5

Source: Company, HDFC sec Inst Research

INDUSTRY EXCHANGES

CMP (as on 13 Jul 2017) Rs 1,079

Target Price Rs 1,322 Nifty 9,892

Sensex 32,037

KEY STOCK DATA

Bloomberg MCX IN

No. of Shares (mn) 51

MCap (Rs bn) / ($ mn) 55/853

6m avg traded value (Rs mn) 459

STOCK PERFORMANCE (%)

52 Week high / low Rs 1,420/925

3M 6M 12M

Absolute (%) (10.9) (10.2) 1.5

Relative (%) (19.6) (27.8) (13.7)

SHAREHOLDING PATTERN (%)

Promoters 0.00

FIs & Local MFs 35.23

FPIs 26.07

Public & Others 38.70 Source : BSE

Amit Chandra amit.chandra@hdfcsec.com +91-22-6171-7345

Apurva Prasad apurva.prasad@hdfcsec.com +91-22-6171-7327

MCX : RESULT REVIEW 1QFY18

Page | 2

Quarterly Financials Snapshot Rs mn 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Operating income 592 630 (6.0) 626 (5.5) Software service expenses 114 106 7.6 102 11.7 Employee Expenses 178 143 24.0 160 11.3 Other Operating Expenses 172 159 8.1 233 (26.4) EBITDA 129 222 (42.0) 131 (1.9) Interest Cost 0 1 NM 0 (100.0) Depreciation 48 49 (2.7) 49 (2.4) Other Income 281 308 (9.0) 243 15.5 PBT 361 480 (24.8) 325 11.3 Tax 98 152 (35.4) 106 (7.1) APAT 263 328 (19.8) 219 20.2 E/o gains (adj for tax) 0 0 NM 0 NM RPAT 263 328 (19.8) 219 20.2 Source: Company, HDFC Sec Inst Research Margin Analysis MARGIN ANALYSIS 1QFY18 1QFY17 YoY (bps) 4QFY17 QoQ (bps) Software service expenses % of Net Sales 19.2 16.8 244 16.3 295 Employee Expenses % of Net Sales 30.0 22.7 726 25.5 451 Other Operating Expenses % of Net Sales 29.0 25.2 379 37.3 (824) EBITDA Margin (%) 21.7 35.2 (1,349) 21.0 78 Tax Rate (%) 27.2 31.7 (446) 32.6 (540) APAT Margin (%) 44.4 52.1 (766) 34.9 949 Source: Company, HDFC Sec Inst Research

Total traded volume declined 3.4% to Rs 12.0tn while blended realization dropped 0.5% QoQ to Rs 23/mn Employee expenses will grow at 10% YoY Advertising expenses was only Rs 1.4mn this quarter but will rise with launch of options PAT stood at Rs 263mn up 20.2% QoQ (higher than our estimate of Rs 232 mn) due to higher other income (Rs 281mn +15.5% QoQ) and lower tax rate (27.2%, down 540 bps QoQ)

MCX : RESULT REVIEW 1QFY18

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India’s Exchange Traded Commodity Derivatives (ETCD)

Composition Of India’s ETCD

Source: Company, Industry, HDFC sec Inst Research Source: Company, Industry, HDFC sec Inst Research Market Share Of Key Commodity Exchanges MCX’s Traded Value : Sectoral Composition

Source: Company, Industry, HDFC sec Inst Research Source: Company, Industry, HDFC sec Inst Research

The value of India’s exchange traded commodity derivatives (ETCD) declined 2% QoQ and 26% YoY to Rs 13.4tn Bullion composition started to rise after three quarters of fall MCX’s maintained a leading market share with 90% share Energy prices are stable and currently accounts for 35% of the quarter’s volumes

17.6 15.6 16.3

18.0 18.3

15.1 13.6 13.4

-2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

Trading value (Rs tn)

31 29 36 36 35 29 24 26

28 29 30 29 29 31

30 31

24 23 21 22 23 31

34 31

17 18 13 13 13 9 12 12

0%10%20%30%40%50%60%70%80%90%

100%

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

Bullion Energy Base Metals Agri

84 83 89 89 89 93 90 90

15 16 10 11 10 6 9 9

30%

40%

50%

60%

70%

80%

90%

100%

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

MCX NCDEX Others

37 35 40 40 39 30 27 29

33 35 34 32 33

34 33 35

29 28 24 25 26 34 37 34

0%10%20%30%40%50%60%70%80%90%

100%

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

Bullion Energy Base Metals Agri

MCX : RESULT REVIEW 1QFY18

Page | 4

MCX : Quarterly Trading Value Analysis MCX : Detailed KPIs Of Contracts Traded

Source: Company, Industry, HDFC sec Inst Research Source: Company, Industry, HDFC sec Inst Research

MCX’s average daily trade value declined for the third consecutive quarter led by GST and demonitisation impact ADTV is expected to pickup post GST implementation in July-17 Number of traded contracts increased 2.6% QoQ to 48mn

14.8 13.0

14.5 16.0 16.4

13.9 12.4 12.0

150

170

190

210

230

250

270

-2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

Trading value (Rs tn): LHS ADTV (Rs bn): RHS

59 57

68 62 61

53 47 48

0.20

0.21

0.22

0.23

0.24

0.25

0.26

0.27

0.28

-

10

20

30

40

50

60

70

80

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

Contracts traded (mn) Avg contract value (Rs mn) - RHS

MCX : RESULT REVIEW 1QFY18

Page | 5

Valuation We expect MCX to post a 30% EBITDA CAGR driven by

revenue CAGR of 15% and EBITDA margin expansion (39.2% in FY19E vs 30.7% in FY17) for FY17-19E. Considering the asset-light nature of the business, we expect RoE to expand to 11.5% in FY19E vs 9.9% in FY17.

MCX currently trades at 39.6x FY18E and 32.6x FY19E EPS (implying PEG 2.1x ~6% discount to EM average).

We see significant value in MCX considering its (1) Strong business franchise, (2) Recent option trading approval from SEBI, (3) Embedded non linearity in business, (4) Favorable regulatory environment and (5) Long term growth prospects. We maintain BUY rating with TP of Rs 1,322 implying a P/E of 40x FY19 EPS.

MCX – Sensitivity Of Target Price To ADTV Assumptions

Target price (Rs)

FY19 PE (x) % of peak ADTV in

FY12 30.0 35.0 40.0 45.0 50.0

FY19E ADTV

226 469 547 625 703 781 44.9% 249 534 623 712 801 889 49.4% 409 991 1,156 1,322 1,487 1,652 81.3% 552 1,399 1,633 1,866 2,099 2,332 109.8% 690 1,793 2,092 2,391 2,690 2,988 137.2%

Source: Company, HDFC sec Inst Research

MCX : RESULT REVIEW 1QFY18

Page | 6

Change In Estimates Particulars Earlier estimates Revised estimates % change FY18E Revenue (Rs mn) 2,837 2,878 1.4 EBITDA (Rs mn) 923 959 4.0 EBITDA margin (%) 32.5% 33.3% 82 EPS (Rs) 26.3 27.2 3.5 FY19E Revenue (Rs mn) 3,601 3,444 (4.3) EBITDA (Rs mn) 1,450 1,351 (6.8) EBITDA margin (%) 40.3% 39.2% (103)bps EPS (Rs) 34.0 33.0 (2.8) Source: Company, HDFC sec Inst Research

ADTV and Realisation Assumptions Rs bn FY15 FY16 FY17 FY18E FY19E Futures ADTV 203 219 226 208 225 YoY % 7.9% 2.9% -8.0% 8.4% Options ADTV 41 184 YoY % 350.5% Total ADTV 203 219 226 249 409 YoY % 7.9% 2.9% 10.1% 64.6% Realization Of Futures (Rs/mn) 19.6 19.1 20.3 23.1 23.1 YoY % -2.8% 6.5% 13.5% 0.0% Realization Of Options (Rs/mn) 4.6 4.6 YoY % 0.0% Blended Realization (Rs/mn) 18.4 18.1 20.3 20.0 14.8 YoY % -1.6% 12.0% -1.4% -26.3% Source: Company, HDFC sec Inst Research

MCX : RESULT REVIEW 1QFY18

Page | 7

Valuation – Global Exchanges Country M-Cap

(US$ mn) Forward P/E (x) EPS growth

(2-yr CAGR) PEG (x) Forward P/B (x) EV/EBITDA (x) ROE (%)

1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd Emerging markets MCX (HDFC Sec estimates) India 853 39.6 32.6 15.5 2.1 3.9 3.7 46.9 32.8 10.0 11.5 Bloomberg Consensus estimates BM&FBovespa SA Brazil 13,034 20.3 16.7 16.9 1.0 1.7 1.7 11.3 9.5 9.3 10.4 Bursa Malaysia Bhd Malaysia 1,285 23.9 22.9 4.1 5.6 6.6 6.3 10.7 10.3 26.4 27.2 Bolsa Mexicana Mexico 1,076 16.5 14.9 9.5 1.6 3.2 3.1 9.5 8.6 19.0 20.2 Multi Commodity Exchange India 853 33.1 24.2 34.0 0.7 4.0 3.4 36.9 23.3 11.6 14.8 EM average 23.5 19.7 16.1 2.2 3.9 3.6 17.1 12.9 16.6 18.2

Developed markets CME Group USA 42,032 23.0 22.2 51.6 0.4 2.0 2.0 14.9 14.0 8.7 8.8 Hong Kong Exchanges Hong Kong 32,932 33.4 30.8 9.9 3.1 7.5 7.3 4.7 4.3 22.5 23.2 Intercontinental Exchange USA 39,787 20.0 18.7 9.2 2.0 2.5 2.3 14.1 13.0 12.1 13.1 Deutsche Boerse Germany 21,239 18.4 16.6 11.3 1.5 3.8 3.4 12.0 11.0 20.5 20.2 Nasdaq OMX USA 11,852 15.8 15.2 5.6 2.7 2.2 2.0 10.8 10.8 13.6 18.9 Japan Exchange Group Japan 9,526 25.2 24.8 1.1 NM 4.2 3.7 14.4 13.9 14.8 14.3 Singapore Exchange Singapore 5,742 20.8 19.5 7.9 2.5 8.4 7.2 14.3 13.5 35.5 35.5 ASX Australia 7,902 22.5 21.4 4.5 4.8 2.6 2.6 14.7 14.0 10.5 12.1 CBOE Holdings USA 10,327 23.6 21.7 6.9 3.1 3.8 3.4 15.2 14.1 20.2 20.6 Hellenic Exchanges Greece 444 35.6 26.1 12.2 2.1 2.8 2.9 15.6 11.8 9.3 12.3 NZX Ltd New Zealand 232 18.8 17.3 10.2 1.7 4.5 4.8 12.6 9.5 24.2 25.7 Developed markets average 23.4 21.3 11.9 2.4 4.0 3.8 13.0 11.8 17.5 18.6 Global average 23.4 20.9 13.0 2.4 4.0 3.7 14.1 12.1 17.2 18.5

Source: Bloomberg, HDFC sec Inst Research Note: 1-yr refers to FY18/CY17 & 2-yr FY19/CY18

Key Risks

Competition from other exchanges (universal exchange) Regulatory delays

MCX : RESULT REVIEW 1QFY18

Page | 8

Income Statement (Standalone) YE March (Rs mn) FY15 FY16 FY17 FY18E FY19E Net Revenues (Rs mn) 2,225 2,349 2,594 2,878 3,444 Growth (%) (34.7) 5.6 10.4 10.9 19.7 Software support charges 384 374 426 421 473 Employee Expenses 349 406 644 713 785 SG&A Expenses 228 307 199 234 248 Other Operating Expenses 388 497 527 550 587 EBITDA 876 767 797 959 1,351 EBITDA Margin (%) 39.4 32.6 30.7 33.3 39.2 EBITDA Growth (%) (39.9) (12.5) 4.0 20.3 40.9 Depreciation 259 246 186 210 226 EBIT 616 521 612 749 1,125 Other Income (Including EO Items) 1,098 311 1,164 1,194 1,234 Interest 14 0 2 2 2 PBT 1,701 831 1,774 1,941 2,357 Tax (Incl Deferred) 450 413 512 553 672 Minority Interest 0 0 0 0 0 RPAT 1,251 418 1,263 1,388 1,685 EO (Loss) / Profit (Net Of Tax) 0 (667) 0 0 0 APAT 1,251 1,085 1,263 1,388 1,685 APAT Growth (%) (18.1) (13.2) 16.4 9.9 21.4 Adjusted EPS (Rs) 24.5 21.3 24.8 27.2 33.0 EPS Growth (%) (18.1) (13.2) 16.4 9.9 21.4

Source: Company, HDFC sec Inst Research

Balance Sheet (Standalone) YE March (Rs mn) FY15 FY16 FY17 FY18E FY19E SOURCES OF FUNDS Share Capital - Equity 510 510 510 510 510 Reserves 11,512 11,529 13,078 13,731 14,538 Total Shareholders’ Funds 12,022 12,039 13,588 14,241 15,048 Settlement guarantee fund 1,871 1,879 1,705 1,790 1,880 Total Debt 0 0 0 0 0 Net Deferred Taxes (Net) 97 49 75 75 75 Long Term Provisions & Others 246 234 345 345 345 TOTAL SOURCES OF FUNDS 14,236 14,201 15,713 16,451 17,348 APPLICATION OF FUNDS Net Block 1,451 1,401 1,521 1,604 1,722 Investments 132 2,230 4,404 4,403 4,404 LT Loans & Advances 382 310 393 412 433 Total Non-current Assets 1,965 3,941 6,318 6,420 6,559 Debtors 107 42 28 39 47 Other Current Assets 786 737 943 932 1,103 Cash & Equivalents 15,385 13,448 11,368 12,337 13,453 Total Current Assets 16,278 14,227 12,340 13,308 14,603 Trading margin from members 2,389 2,473 2,000 2,285 2,772 Other Current Liabilities & Provns 1,617 1,495 945 991 1,042 Total Current Liabilities 4,007 3,967 2,945 3,277 3,814 Net Current Assets 12,271 10,260 9,395 10,032 10,789 TOTAL APPLICATION OF FUNDS 14,236 14,201 15,713 16,451 17,348

Source: Company, HDFC sec Inst Research

MCX : RESULT REVIEW 1QFY18

Cash Flow (Standalone) YE March (Rs mn) FY15 FY16 FY17 FY18E FY19E Reported PBT 1,701 831 1,774 1,941 2,357 Non-operating & EO items (1,075) (927) (1,164) (1,194) (1,234) Interest expenses 14 0 2 2 2 Depreciation 259 246 186 210 226 Working Capital Change 207 518 (1,160) 308 337 Tax Paid (409) (290) (512) (553) (672) OPERATING CASH FLOW ( a ) 696 378 (874) 714 1,017 Capex (84) (202) (311) (288) (344) Free cash flow (FCF) 613 175 (1,185) 426 673 Investments 1 (2,098) (2,174) 0 0 Non-operating Income 310 92 1,164 1,194 1,234 INVESTING CASH FLOW ( b ) 227 (2,209) (1,320) 906 889 Debt Issuance/(Repaid) 0 0 0 0 0 Interest Expenses (14) (0) (2) (2) (2) FCFE 599 175 (1,187) 424 671 Share Capital Issuance 0 0 (0) 0 0 Dividend (179) (614) (895) (650) (789) FINANCING CASH FLOW ( c ) (193) (614) (897) (651) (791) NET CASH FLOW (a+b+c) 731 (2,445) (3,091) 968 1,116 EO Items, Others 536 509 1,011 0 0 Closing Cash & Equivalents 15,385 13,448 11,368 12,337 13,453 Source: Company, HDFC sec Inst Research

Key Ratios (Standalone) FY15 FY16 FY17 FY18E FY19E PROFITABILITY (%) GPM 82.7 84.1 83.6 85.4 86.3 EBITDA Margin 39.4 32.6 30.7 33.3 39.2 APAT Margin 56.2 46.2 48.7 48.2 48.9 RoE 10.7 9.0 9.9 10.0 11.5 RoIC (or Core RoCE) 42.5 22.0 17.3 18.8 21.8 RoCE 7.1 6.0 6.9 7.2 8.2 EFFICIENCY Tax Rate (%) 28.0 30.8 28.8 28.5 28.5 Fixed Asset Turnover (x) 0.1 0.1 0.1 0.1 0.2 Debtors (days) 17 7 4 5 5 Other Current Assets (days) 118 104 124 110 110 Other Current Liab & Provns (days) 590 463 299 300 291 Cash Conversion Cycle (days) (455) (353) (172) (185) (176) Debt/EBITDA (x) (15) (14) (12) (10) (8) Net D/E (x) (1) (1) (1) (1) (1) Interest Coverage (x) 124 3,941 NM NM NM PER SHARE DATA (Rs) EPS 24.6 21.3 24.8 27.2 33.0 CEPS 29.7 26.1 28.4 31.3 37.5 Dividend 10.0 6.5 15.0 10.9 13.2 Book Value 235.7 236.1 266.4 279.2 295.1 VALUATION P/E (x) 43.8 50.7 43.6 39.6 32.6 P/BV (x) 4.6 4.6 4.0 3.9 3.7 EV/EBITDA (x) 48.0 57.4 57.2 46.9 32.8 OCF/EV (%) 1.7 2.4 (1.9) 1.6 2.3 FCF/EV (%) 1.5 1.9 (2.6) 0.9 1.5 FCFE/Mkt Cap (%) 0.2 (0.2) (0.4) 0.3 0.3 Dividend Yield (%) 0.9 0.6 1.4 1.0 1.2

Source: Company, HDFC sec Inst Research

MCX : RESULT REVIEW 1QFY18

Page | 10

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 19-Oct-16 1,312 BUY 1,667 27-Oct-16 1,299 BUY 1,634 9-Jan-17 1,250 BUY 1,541

16-Jan-17 1,201 BUY 1,503 11-Apr-17 1,238 BUY 1,563 5-May-17 1,155 BUY 1,558 11-Jul-17 1,098 BUY 1,359 14-Jul-17 1,079 BUY 1,322

500

700

900

1,100

1,300

1,500

1,700

Jul-1

6

Aug-

16

Sep-

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Oct

-16

Nov-

16

Dec-

16

Jan-

17

Feb -

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

MCX TP

RECOMMENDATION HISTORY

MCX : RESULT REVIEW 1QFY18

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Disclosure: We, Amit Chandra, MBA & Apurva Prasad, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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MCX : RESULT REVIEW 1QFY18

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