MOSL: MCX (Buy)-Opportunity in adversity?

MCX: Opportunity in adversity?

(MCX IN, Mkt Cap USD0.5b, CMP INR688, TP INR1050, 53% Upside, Buy)

Multiple concerns have weighed on the stock…

MCX’s stock price has corrected by a significant ~25% year-to-date (YTD) owing to a number of factors. These include:

• Lackluster volumes in Options since its launch in October 2017
• Universal licenses becoming effective in October 2018, allowing for entry of competition and, thus, putting MCX’s market share under threat
• Recent media articles citing CBI investigations into wrong-doings by erstwhile Forward Markets Commission (FMC) officials in granting MCX a nationwide commodity derivatives exchange status, as well as relaxation of rules for promoter shareholding before the company’s IPO in 2012

 …but much of these appear overdone

SEBI’s latest regulation – a positive from competitive intensity perspective

• In its 26th March 2018 circular, the Securities and Exchange Board of India (SEBI) has stipulated requirements for liquidity enhancement schemes (LES) for commodity derivatives. It cites that “If any commodity derivative product is 'liquid' on any of the exchanges i.e. there is at least one exchange where the average daily turnover in Options or/and Futures on similar underlying commodity is more than or equal to INR2b for agricultural and agri-processed commodity, and INR10b for non-agricultural commodity during the last six months, then no other exchange is eligible to launch LES on the same derivative product, unless the exchange where the product is liquid, has itself also launched a LES on said product” (access the circular here).
• It further stated that “Exchanges shall put in place a mechanism to ensure that the LES does not create artificial volumes, does not take away liquidity form the market, is not manipulative in nature and shall not lead to misspelling of the product in the market.”