MOSL: MCX (Buy)-Volume triggers playing out- increased competition remains a key risk

​MCX: Volume triggers playing out; Reiterate Buy; increased competition remains a key risk

(MCX IN, Mkt Cap USD0.7b, CMP INR907, TP INR1300, 43% Upside, Buy)

We hosted MCX at our recent Midcap Conference. In our discussions, we covered a range of topics such as volumes on the exchange, potential triggers, and competitive threats. Some notable highlights:

• - Post demonetization, a series of problems has kept a revival in bullion at bay - gold volumes have declined 47% and silver volumes have declined 31% in the last 12 months. However, there has been a strong volume uptick in base metals.
  
• - The recently-launched options constitute 5% of total gold volumes; MCX expects ~20% contribution towards the end of FY18. A basket approval on the rest of the eligible contracts can be expected soon, as clearing and settlement on the first expiry has been seamless. MCX would begin charging on options once it has more commodities covered and once participation reaches a satisfactory level.
  
• - While there are triggers in the form of new products and higher participation, threat also exists from increased competitive intensity on the Universal Exchange License proposition. Current SEBI criteria for the launch of options protect MCX; any relaxation would reverse the situation and pose additional risks.