MCX primed for volume surge after tech upgrade

After a technology upgrade, the Multi Commodity Exchange of India (MCX) appears poised for an improvement in volumes.

The premier commodity and forex exchange reported a loss of Rs 19.1 crore in the July-September quarter (second quarter, or Q2) of 2023-24 (FY24).

This was attributed to higher software charges payable under an extended service agreement with 63 moons technologies and a one-off cost towards core guaranteed funds (CGF).

Overall volumes improved by 86 per cent year-on-year (Y-o-Y) to Rs 67 trillion, and total revenue grew by 30 per cent Y-o-Y to Rs 165 crore (in line with expectations), with an earnings before interest, tax, depreciation, and amortisation (Ebitda) loss of Rs 35.3 crore.

Profits may remain under pressure for another quarter, but a stable, glitch-free transition to the new technology platform in October has already boosted trading volumes in the futures and options segments in the third quarter (Q3) of FY24.

The long-term growth opportunity remains, and trading volumes may benefit from new product launches.

Bullion volumes rose by 61 per cent, with increases in gold and silver volumes.

Volumes in the energy segment jumped by 109 per cent Y-o-Y due to a 146 per cent Y-o-Y surge in crude oil volumes in Q2FY24.

However, base metal volumes dropped by 49 per cent Y-o-Y, attributed to steep declines in aluminium and copper volumes.

In Q2FY24, operational revenue increased by 30 per cent Y-o-Y, driven by options revenue (up 97 per cent Y-o-Y), but futures revenues declined by 23 per cent Y-o-Y on lower volumes.

Operating expenses increased by 214 per cent Y-o-Y, with a 516 per cent increase in software support charges and a one-off contribution of Rs 11.4 crore towards CGF, a further contribution towards CGF of Rs 13 crore will be taken in Q3FY24.

Growth in employee and other expenses was at 20 per cent Y-o-Y.

The reported Ebitda and overall loss were at Rs 9.8 crore and Rs 19.1 crore, respectively.

The futures average daily turnover (ADTO) declined by 22 per cent Y-o-Y due to lower interest in energy and base metals.

The options ADTO increased by 174 per cent, but premium growth was lower at 97 per cent, suggesting a much lower premium/ADTO at 1.84 per cent (versus 2.55 per cent Y-o-Y).

The transition is deemed successful according to management.

Volumes are expected to return to previous levels soon.

The exchange is seeking approvals for new products and awaiting Sebi validation apart from contracts in new underlyings like steel TMT bar, cotton, and electricity, the MCX also intends to launch shorter duration options.

The CGF had shortfalls due to higher open interest (OI), with OI hitting highs of Rs 42,000-43,000 crore.

MCX will have to contribute an additional amount to CGF if OI rises further.

However, this is viewed as a positive development.

The MCX hopes to provide direct market access to attract foreign portfolio investors by the next quarter leading to an anticipated surge in trading.

The stock has surged significantly on the results, hitting a record high of Rs 2,951.8 on Wednesday before closing higher by 4.7 per cent.

Analysts are estimating a 45 per cent compound annual growth rate in options turnover between 2022-23 (FY23) and 2025-26 (FY26), and Ebitda margins are expected to reach 67 per cent in FY26, up from 29 per cent in FY23.

The return on equity should expand to 25 per cent in FY26 from 10.4 per cent in FY23.

However, FY24 earnings per share estimates may be revised downwards due to the higher CGF contributions required.

The new commodity launches on the National Stock Exchange may also lead to competition if they become popular.

According to Bloomberg, three of the seven analysts polled in November have  buy  rating, one has a  reduce  rating, and the rest are  neutral / hold.

Their average target price is Rs 2,498 compared to the current price of Rs 2,904.15.

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