Q1FY24 Review: MCX: One-off cost masks strong operational perf

1 Aug 2023 , 12:05 PM

Delays in technology migration is offsetting an otherwise strong operational performance. Despite a 9-month delay, MCX has not shared a firm timeline for the tech migration but has guided to achieve this ahead of the deadline (Dec-2023). Given the one-off costs, FY24 is a write-off year but FY25 will see a sharp recovery. Strong momentum in the Option segment and likely cost savings from the transition to new tech platform, will drive earnings. Analysts of IIFL Capital Services value the stock at 30x 2YF EPS and maintain BUY. 

No timelines for transition; but endeavour is complete migration before deadline: 

MCX management shared that issues around End-of-Day (EOD) / Beginning of Day (BOD) processes forced the company to further extend contracts with 63 Moons for 2 quarters (until December 2023). The company said that it has made progress in the last 1 month on the issues, but BOD reports should be available by 6AM for the members. MCX is confident of streamlining these issues and restarting member mock sessions from August 2023. Also, audit process (would take 3 weeks) would be done once the platform is free of all glitches. Although the company has time till Dec-2023 to complete migration, it is targeting to achieve this by Oct-2023; however, no timelines were committed. 

Tech cost mars an otherwise strong operating performance: 

MCX’s reported PAT declined by 50% YoY, since the company paid Rs810mn (~5x of the usual amount) as technology expense to 63 Moons Ltd. The sharp payout masked the otherwise strong operational performance. Analysts of IIFL Capital Services note that the adjusted profits were up 100% YoY, on the back of 2.2x YoY increase in option volumes to Rs620bn ADTO. Options now account for 53% of total revenues. Futures remained weak and declined 15% YoY to Rs214bn ADTO. Going forward, the company’s efforts to increase traded UCCs would aid volume growth. Separately, the company is in the process of finalising CTO and CRO shortly. 

Maintain BUY: 

Although FY24 is a write-off year, given Rs3.3bn payouts to 63 Moons, there is likely to be a sharp recovery in FY25 considering the strong underlying performance. Despite no timelines shared by the company analysts of IIFL Capital Services believe MCX is better positioned to complete the transition this time as significant progress has been made. Hence, analysts of IIFL Capital Services increase their target multiple to 30x (vs. 27x earlier) on 2YF EPS and ascribe a fair value of Rs1,850/sh. Maintain BUY.