Shares of Multi Commodity Exchange of India Ltd (MCX) trade at over 40 times 12-month earnings till December 2016. In other words, investors’ expectations run really high. But those expecting extraordinary growth from the company would be disappointed with its December quarter results.
Thanks to demonetization, traded volumes on MCX fell around 17% sequentially in the December quarter. But thankfully for the exchange, it had raised transaction charges by around 25% effective 1 October, thanks to which revenues from operations rose 6.5% compared to the September quarter.
However, expenses rose sharply, partly due to a newly introduced variable compensation. According to analysts at JM Financial Institutional Securities Ltd, last quarter’s expenses included an amount of Rs5.25 crore, relating to variable compensation for the first three quarters. Of this, Rs3.5 crore was pertaining to the first two quarters. Adjusted for the expenses pertaining to earlier quarters, pre-tax profit of MCX fell by around 3% sequentially.
Year-on-year growth numbers look decent—revenue from operations grew 27% and adjusted pre-tax profit rose 43%—but note that is compared to a low base. Expecting profits to grow at a similar pace going forward is a tall order.
Some analysts are gung-ho about the company’s prospects when it launches commodity options contracts—expected in a few months. But it remains to be seen if options trading adds meaningfully to transaction revenue, or instead cannibalizes revenue earned in the futures segment.
Options are far cheaper from a trader’s perspective, which is the reason they account for more than 85% of all equity derivatives trading on the National Stock Exchange (NSE). But as pointed out in this column earlier, while options trading has led to enormous growth in NSE’s volumes, transaction revenues have growth by only 10% annually between fiscal years 2009 and 2016.
Besides, it remains to be seen how long the Securities and Exchange Board of India staves off NSE and BSE from commodities trading. Even if these exchanges aren’t as successful as MCX in the segment, their entry will result in lower transaction charges and lower profits.
MCX’s valuations, however, make little of these risks and instead make much of rumours that CME Group Inc. is interested in buying a 15% stake in it. Investing in the firm, therefore, has become a highly risky proposition.