MCX: Out of the woods; getting down to business

28 Nov 2023 , 12:01 PM

Recommendation: Buy; Target price: Rs 3325

Analysts of IIFL Capital Services met MCX management to understand their new priorities post the successful technology migration. Mr P S Reddy, MD and CEO, shared: 1) Technology migration was largely smooth. 2) Primary focus is to get corporates to hedge their commodity risk on exchange. 3) Introduction of new products that have market potential (steel TMT bars) and/or potential to improve liquidity (weekly serial options). 4) Increasing market depth by facilitating higher institutional participation. 5) Policy advocacy with government and regulator to grow the commodities market. Analysts of IIFL Capital Services like MCX’s growth strategy and remain constructive on the stock. They upgrade their FY25-26 EPS by 20-25% to account for better volume run-rate. They value the stock at 35x FY26 EPS and maintain BUY. 

Focus on new product launches: 

Post the successful technology migration, MCX looks to launch new products over the next three to six months. In Futures – it would launch steel TMT bar contracts, while it is targeting monthly contract on bi-monthly contracts in Options. The two new products within options that the company is targeting is Option Index and Serial contract on crude oil. The serial contract would be a monthly contract with different week expiries on the same monthly futures contract. This is likely to be a key volume driver. In addition, MCX would focus on addressing hurdles faced by institutional players to increase participation. 

Crude oil volatility to drive near-term volumes: 

Energy basket is a key revenue contributor for MCX – it accounts for 29% of futures and 90% of option volumes. Sustained volatility in crude oil and natural gas prices have been driving volumes. In FY24, although futures volumes are down 13% YoY to Rs203bn ADTO, option volumes are up 132% YoY to Rs786bn ADTO. Over last three months, sustained volume run-rate has risen to >Rs950bn ADTO, driven by crude oil volumes. Increasing retail participation and addition of new algo traders are likely to aid volume growth.

Upgrade estimates; reiterate BUY: 

Analysts of IIFL Capital Services upgrade MCX’s FY25-26 EPS by 20-25% to account for higher volume run-rate. Introduction of new products is likely to drive a more sustainable growth, going ahead. The stock has nearly doubled in the last three months, driven by tech migration, and now trades at 31x FY26 EPS. Continued momentum in volume growth could drive further re-rating. Analysts of IIFL Capital Services value MCX at 35x FY26 EPS (implied TP of Rs3,325 – 14% upside at CMP) and reiterate BUY.