MCX Ltd: Stock Pulse
08-11-2023

Stock pulse is a format where we explore the most important questions to understand the company's performance.

  • What are the revenue drivers for the company and the future outlook?

MCX has a 96.3% share in the Indian commodity futures market. The company charges exchange fees on trades placed in commodities like Crude oil, Silver, Gold, and Copper as well as Agro commodities. It is keen on new product launches and small-size contracts of existing commodities which shall help it hold its lion's share in the commodities market. Commodity futures contribute 57% of the revenue whereas commodity options contribute 43% of revenue.

  • How is the transition to the new software platform working out?

MCX has been under the spotlight for a long time about its transition to a new commodity trading platform from the one developed by its erstwhile promoter Financial Technologies India Ltd, now known as 63 Moons. It had recently extended its contract with 63 Moons till December 2023 at a higher cost which resulted in a fall of 12% in the stock price on the date of this announcement. The contract with 63 Moons was very expensive and thus was putting a major dent in the company’s profitability. Even though MCX was keen on getting the new platform launched as soon as possible, there were a lot of hurdles concerning all the necessary tests done and getting approvals from SEBI. All these software platform issues that MCX had with launching the new platform with TCS have finally ended and the company has now successfully shifted to the new platform. There were glitches seen in the starting days of the launch, but now the platform seems to be running fine.

  • How is the Commodity Options segment shaping up?

Commodity Options segment is gaining significant traction. Single-side Average Daily Notional Turnover (ADTO) has spiked 7x/3x in 2022/2023 and further doubled to ~Rs.62,000 Cr in Q1 FY24. The lower margin requirement in options makes it a preferred instrument for hedgers/speculators to trade. Trader’s interest seems to drop in the futures segment as visible from the ADTO in futures. 

  • Will the company improve its margin profile?

The major investment for the new platform is capital in nature. The company won’t be paying any charges for the first year. Post that, maintenance costs are negligible and depreciation will be a major cost. Just like we see in other exchange platforms like IEX, operating margins post the shift have taken a big upswing and shall go to about ~60%. This shall mean a significant jump in its profitability.

  • Does the change in segment mix impact revenues?

Commodity futures revenue has been declining at the rate of 14% yearly since FY21 whereas commodity options revenue has been growing at a rapid pace (4.4x in FY23). MCX revenue (fees) as a percentage of the premium in Options is about 15 times that in Futures contracts. Thus the loss of revenue in the futures segment is more than compensated by the growth in the Options segment. Going ahead we expect options revenues to grow at a healthy pace of 51% CAGR over FY23-26F. 

  • What are the concern areas?

As MCX was maneuvering the regulatory concerns over its new trading platform, its better-known rivals NSE and BSE, despite their relatively minuscule market share have come up with commodity options.  BSE is playing a low-cost strategy to lure traders, which is why it is gaining market share. However, the segment itself is growing at a fast pace and thus more than one player can co-exist. It is to be seen if MCX can hold the market share in this segment as it has in the Futures segment.

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