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Multi Commodity Exchange (MCX) is the leading commodity exchange in India. The company facilitates price determination in commodities and the contracts offered are used for risk mitigation of industry participants.
With a commanding market share of over 95%, it operates as a near monopoly in commodity trading volume. Operating through its wholly owned subsidiary, the Multi Commodity Exchange Clearing Corporation Limited (MCXCCL), the company additionally offers settlement and clearing services.
The company had been facing issues with respect to Commodity Derivatives Platform (CDP) as there has been delay in migration to new platform. The issue is now behind and the higher costs because of the platform will normalise from the fourth quarter of this fiscal.
Since the announcement of Q3 results on February 10, the stock of MCX fell initially but has recouped all losses by closing at ₹3,832.75 last week. As it has rallied sharply since July last year the valuation has turned expensive. The one-year forward P/E (Price/Earning) stands at 47 times versus the five-year average of 32.
We had suggested that investors accumulate MCX in June last year when the share price was trading at around ₹1,563. Given the recent developments, what should investors do? Below is our take.
Platform cost
In the quarter ended December 2023, powered by option trading volume, the company’s total revenue jumped 28 per cent year-on-year (yoy) to ₹209.3 crore. Operating revenue was up 33 per cent to ₹191.5 crore.
However, MCX ended up making a loss despite healthy top line growth. EBITDA loss stood at nearly ₹2 crore in Q3FY24 compared to a profit of ₹52.8 crore in Q3FY23. PAT was a negative ₹5.4 crore for the quarter as against a profit of ₹38.8 crore in the same quarter last year.
The loss was mainly due to higher software support charges. This was because of the delay in migration to a new Commodity Derivatives Platform (CDP) developed by Tata Consultancy Services (TCS). As the transition was delayed, MCX had to extend the licence for the old platform, provided by 63 Moons Technologies, at a significant cost.
The company had to spend ₹81 crore per quarter between January and June 2023 and ₹125 crore per quarter between July and December 2023. For comparison, this cost was ₹15 crore a quarter, historically. Further, there was an SGF (settlement Guarantee Fund) contribution of ₹13.1 crore in Q3FY24.
That said, MCX transitioned to the new CDP in October last year. So, the costs related to the platform are expected to normalise from the fourth quarter of this year.
The total cost of ₹237 crore of the new CDP will be amortised over the next 5-10 years. MCX will pay no annual maintenance charges for TCS till October 2024. It is expected to kick in post that. At this point, this cost is not declared by the company.
Since MCX will not incur the one-off costs like in the previous quarters, it is expected to post a strong bottom line from Q4FY24 onwards, which will reflect fully in the next fiscal year. For FY25, current Bloomberg consensus estimates project EBITDA to grow by 510 per cent Y-o-Y to ₹568 crore and EPS to increase by 338 per cent to ₹87.31.
Soaring options volume
The Average Daily Turnover (ADT) of futures and options combined grew 83 per cent yoy to ₹1.15 lakh crore in Q3FY24. But dissecting this will show that it was the options’ ADT that ballooned whereas ADT in futures declined. Consequently, of the ₹156 crore income earned through transaction charges, nearly two-thirds i.e., ₹101 crore, is from options.
ADT in options stood at ₹95,989 crore in the third quarter of this financial year, an increase of 144 per cent compared to ₹39,402 crore in the same quarter of the previous year — whereas ADT in futures shrank to ₹20,796 crore for the quarter versus ₹24,265 crore in the same period of the last fiscal.
Energy commodities is the dominant volume contributor in options segment with an ADT of ₹86,224 crore. Interestingly, its share has come down to 90 per cent of the total options volume in Q3FY24, from nearly 94 per cent in Q3FY23. For the corresponding period, the ADT of Bullion options increased nearly fourfold to ₹8,237 crore. A pick-up in gold and silver options volume is positive for the company as more trading can fetch more income for MCX by way of transaction charges.
MCX plans to launch options on crude oil mini futures and natural gas mini futures soon, which is likely to further boost options trading.
In the futures segment, only Bullion saw an increase in volume. ADT in bullion futures improved 13 per cent yoy for the quarter to ₹13,059 crore. However, ADT in energy futures and base metals futures declined 31 and 58 per cent yoy to ₹5,655 crore and ₹1,719 crore, respectively.
Higher interest in bullion futures could be because of the lower margin requirement. For instance, the margin for gold futures is about 8 per cent but for crude oil futures and natural gas futures, it is around 34 and 20 per cent, respectively.
Silver dominated the futures segment with a 38 per cent share, followed by gold (23 per cent), natural gas (17 per cent), and crude oil (11 per cent).
Overall, increasing interest in commodity options trading fuels MCX turnover and this is expected to persist in upcoming quarters.
What should investors do?
Although the scrip has considerably appreciated, we suggest that investors who have 3–5-year perspective continue to hold the stock.
This is because, after posting losses for two quarters in a row, the company is finally expected to reap the benefits of shifting to its own platform, going ahead.
A part of this is factored in the price but we think there is more potential. MCX, which garners healthy volumes in the options segment, can be boosted further by the launch of new contracts. Moreover, the company has a near monopoly in commodity derivatives space in the country and there is no threat to this in the foreseeable future. For instance, MCX holds a market share of 96 per cent in commodity futures in India.
The above factors can support the higher valuation. .
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