MCX Research Report

Date of report November 14, 2017
Target Price (Rs) 1300
Gain (%) 37

Multi-faceted reforms have only just begun

Key takeaways from India Commodity Day hosted by MCX
We attended the ‘India Commodity Day’ hosted by MCX on its 14th Anniversary.

The session saw a speaker representation from MCX’s senior management and also prominent members of the ecosystem, including:

1) P. S. Reddy – MD & CEO, CDSL
2) P. K. Bindlish – CGM, Commodity Derivatives Market Regulation, SEBI
3) G. Mahalingam – Whole-time member, SEBI
4) R. Amalorpavanathan – Deputy MD, NABARD
5) Supriyo Bhattacharjee – DGM, Financial Markets Regulation (FMRD), RBI
6) Dr. Rakesh Junjhunwala – Rare Enterprises
7) Kevin Piccoli – Deputy Director, US CFTC
The discussion focused on a range of topics, such as the steps taken by the regulators and the way forward, the idea of commodities as an asset class, and commodity price outlook.

Some notable highlights from the event:

Unexplored market in the context of physical underlying

 Commodities are an important cog in the wheel of an emerging economy like India, and commodity derivatives have a huge potential in such a market. With only a fraction of that opportunity explored so far, the bigger possibilities are still to be unraveled. Considerable efforts have gone by both – the regulators and the exchanges – in this direction. The opportunity landscape can be gauged with following data:

 In India, the notional value of commodity derivatives is less than USD1t – less than half of the country’s GDP of USD2.3t.

 This notional value is ~2x GDP in China, ~2.4x in the US and 6.4x in the UK.

To conclude with our views on MCX

 The regulator’s drive in sync with our positive thesis: Our positive thesis on MCX stems from the believe that it is a platform on its transformation journey from catering largely to speculative interests of a small set of participants to a deeper ecosystem that eventually acts as a platform for hedgers across commodities. The ideas brought forth during the event re-emphasized those endeavors of the regulator-exchanges combine, and growth in exchange’s liquidity will be an indicator of the progress. We expect FY19 volumes to increase to INR356b per day from FY17 levels of INR235b, driving earnings CAGR of 31% during this period. Our price target of INR1,230 discounts FY19E earnings by 30x. Maintain Buy.

 Options criteria protect MCX’s turf: MCX’s monopolistic hold in the nonagricultural commodities was strengthened further by the criterion for an exchange to launch options

– INR10b+ average daily turnover for a year in the commodity of interest. We believe the criterion protects MCX’s turf amid likelihood of competition being allowed in the commodities derivatives segment.

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