by In this article, we will do a fundamental analysis of MCX India, as usual, we will cover the company and the management of MCX, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if the MCX India is fundamentally strong or not then we will do the valuation analysis of MCX to decide if it is worth investing in the company at current levels or not.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Introduction
The Multi Commodity Exchange of India limited that is MCX India’s. MCX India’s first listed exchange is a state-of-the-art commodity derivatives exchange that facilitates online trading of commodity derivatives transactions thereby providing a platform for price discovery and risk management.
The exchange was started in November 2003 and operates under the regulatory framework of the Securities and Exchange Board of India i.e. SEBI.
As the ratings are based on long-term past performance they are relevant for at least three years in the future until FY2022.
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Fundamental Analysis of MCX
Fundamental Analysis of MCX India is differentiated into different categories are as follows, all units are in millions except ratios and per share data.
Economic Model
- The company operates in the online trading of financial contracts and has a near-monopoly in the online trading of commodities.
- The exchange has an extensive national reach with 681 plus registered members and 55,660 plus authorized persons with its presence in around 1037-plus cities and towns across India.
- MCX is also India’s leading commodity derivatives exchange with a market share of 97.05% in terms of the value of commodity futures contracts traded in FY2021.
- Multi Commodity Exchange clearing corporation limited that is MCX CCL a wholly-owned subsidiary of MCX is the first clearing corporation in the commodity derivatives market.
- MCX CCL having state of art risk management system. It is the central counterparty for all trades executed on MCX’s trading platform.
- It also provides electronic commodity accounting and receipts tracking system through the web-based portal commodity receipts information systems comprises further it provides a settlement guarantee for all trades executed on MCX via settlement guarantee fund that is SGF.
- This overall gives a solid economic model to the company. Therefore this category gets five stars in MCX India fundamental analysis.
Business Model and Management
- MCX offers trading in commodity derivative contracts across varied segments including bullion, industrial metals, energy. and agricultural commodities as also on indices constituting these contracts.
- It is India’s first exchange to offer commodity options contracts, and bullion, index futures contracts.
- The exchange focuses on providing commodity value chain participants with neutral, secure, and transparent trade, mechanisms, and formulates quality parameters, and trade regulations in conformity with the regulatory framework.
- MCX has also forged strategic alliances with leading international exchanges such as CME Group, London metal exchange LME, Daily and commodity exchange DCE, Taiwan futures exchange, etc.
- The exchange has also tied up with various trade bodies industry associations and educational institutions across the country.
- These alliances enable the exchange in improving trade practices, increasing awareness, and facilitating overall improvement of the commodity market.
Leadership
- Mr. Saurabh Chandra is the chairman of the company and was a former secretary to the ministry of petroleum, and gas.
- He has 40-plus years of experience in the ministry of finance and ministry of commerce and industry.
- Mr. P.S. Ready is the managing director and chief executive officer.
- He is a former MD and CEO of Central Depository Services India Limited CDSL.
- Overall the management is qualified and has shown interest in shareholder wealth creation.
- Therefore this category gets five stars in MCX India fundamental analysis.
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Company Financials
Company Financials of MCX India are as follows:
Growth Ratios
- The company has a weak financial position due to the nature of its business
- The clearing and trading business already has a cap on services charged.
- The working capital is also very high and exceeds revenue.
- The CAPEX is mostly used up in business activities and technology.
- Hence overall the company does not have a stable growth trajectory.
- Therefore this category gets two stars in MCX India fundamental analysis.
Profitability Ratios
- The margins have been declining over the years but the company still has good margins.
- The gross margin has also declined due to the increasing cost of services delivered.
- This also indicates that the company is not able to pass down its increasing costs to its customers.
- Therefore this category gets three stars in the fundamental analysis of MCX India.
Cash Flow Ratios
- The net income margin is declining and the CAPEX as a percentage of sales has almost remained flat.
- The free cash flow as a percentage of net income has been fluctuating.
- The free and operating cash flow growth has seen a slight improvement.
- This overall shows a stable cash flow position for the company.
- Therefore this category gets four stars in the fundamental analysis of MCX India.
Liquidity and Solvency Ratios
- The company has a small interest-bearing debt in its capital structure the financial leverage, and debt to equity ratios are hence flat over the years the company.
- Therefore does not have any significant concerns about its solvency.
- The current ratio is above the minimum threshold of one which indicates a surplus of current assets over current liabilities.
- The quick ratio has also declined over recent years this overall indicates a good but declining liquidity position for the company.
- Therefore this category gets four stars in MCX India fundamental analysis.
Efficiency Ratios
- Overall the business efficiency has improved over the years due to the increasing scale and less competition in various lines of business for the company.
- The payables period has increased from 30 to 103 days and the receivable period has also declined.
- The cash conversion cycle has decreased from nine days to minus 94.84 days and it still remains negative.
- This overall shows good cash flow and working capital management.
- Therefore this category gets five stars in MCX India fundamental analysis.
ROE & ROCE
- The leverage ratio and asset turnover ratio has been flat over the years.
- The operating margin is good but declining over the years.
- The interest burden ratio is high due to low interest payments and is expected to remain constant in the near future.
- The return on equity overall is stable due to interest burden and tax efficiency.
- If you look at the profitability of the company.
- The latest ROE for FY21 is 12.1% and ROCE is 14.69%.
- It means the profitability is flat over the years.
- Therefore this category gets four stars in MCX India Fundamental Analysis.
Future Growth prospects
- Some insights for the coming years from the analysis management discussions and conference calls are as follows:
- Management has indicated that crude volumes remain dented as the sentiment of participants was impacted due to negative price settlement issue and an increase in margin requirement.
- As the volatility reverts to a manageable level the management is positive of reduction in margin requirements and hence improvement in market participation.
- Even as the change in contract specifications continued to impact volumes management sees huge potential in base metals.
- The company has decided not to give salary increments beyond a certain level. It is negotiating with vendors also on different cost reduction initiatives.
- Overall the company has good fundamentals but can see some more improvement in revenue growth and balance sheet positions due to financial inclusion and formalization of the economy.
- Therefore this category gets four stars in fundamental analysis of MCX India.
The overall rating is arrived at by taking the average of the above 10 category ratings and round it up if it is above 0.5 and rounded down if it is below 0.5. overall fundamental rating MCX India shares 3.9 out of 5. Therefore it is a four-star stock.
Shareholding Pattern
- If you look at the shareholding pattern.
- Its promoter has 0% stake in the company.
- Foreign institutions hold a 35.27% stake.
- Domestic institutions hold 24.05%.
- General public holds a 40.69% stake.
Valuation
- The company has started trading at higher multiples in recent years due to some fundamental industry factors like increasing financial awareness, inclusions rising per capita income, etc.
- Overall has increased the addressable market size for the company due to the variety of its offerings there might however not be any significant increase in the net income for the company in the near future.
- Therefore this category gets three stars in MCX India fundamental analysis.
Conclusion
Overall if we conclude MCX India Ltd has an excellent business and its management, strong competitive advantage, and good financial and bright growth prospect which makes it a fundamentally good company.
It is currently available at a fair valuation. What is your take on MCX India Ltd have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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