Multi Commodity Exchange of India (MCX) reported Q1 results on July 29 and followed it up with an earnings call Monday, July 31, after market close.
There was considerable improvement in the revenue compared to the same quarter last year as trading in options continued to improve. However, profitability dropped on the back of huge technology costs which came as a result of the delay in migration to the new Commodity Derivatives Platform (CDP).
The total revenue for Q1FY24 soared 41 per cent year-on-year (yoy) to ₹166 crore. EBITDA and PAT were down 47 and 53 per cent to ₹31 crore and ₹19.7 crore, respectively. The earnings per share (EPS) stood at ₹3.9 for the quarter compared with ₹8 for the same quarter of FY23.
Nevertheless, the drag on the bottom line because of the delay was expected, so there was not much negative impact on the stock price. MCX’s stock lost 0.3 per cent on Monday to end at ₹1,662.45 on BSE.
On June 24, businessline analysed the impact on profitability because of high technology costs in the MCX stock call. However, because of the company’s long-term growth prospect and given that the elevated costs related to the platform is a temporary factor, we recommended to accumulate the stock of MCX on dips. Importantly, the company management mentioned in the earnings call that it is optimistic and expecting the migration to the new CDP to happen by September or October.
Options boost
The Average Daily Turnover (ADT) in futures continued to slide whereas the ADT in options posted solid growth. The futures ADT dropped 15 per cent to ₹21,413 crore in Q1FY24 versus ₹25,234 in Q1FY23. However, the options ADT, on a notional basis, shot up 217 per cent to ₹61,928 crore from ₹19,539 crore in the corresponding period of the previous year.
That said, sequentially, the ADT improved in both segments — futures saw a growth of 4 per cent and options increased 35 per cent.
While bullion was the largest volume provider in futures, with 60 per cent share, energy was the leader in options segment with 89 per cent contribution.
Overall, the total revenue for the quarter expanded 41 per cent yoy to ₹166 crore.
Profits drag
Total expenses for the quarter more than doubled to nearly ₹140 crore as against a little over ₹65 crore in the corresponding quarter of the last fiscal. This was due to the huge fees paid for the extension of the current platform provided by 63 Moons Technologies as the transition to the new platform developed by the Tata Consultancy Services (TCS) is getting delayed.
For Q1FY24, the cost of software support, product license and computer technology cost about ₹96 crore, impacting the bottom line significantly. During the first quarter of FY24, EBITDA shrank 47 per cent to ₹31 crore and the profit after tax (PAT) was down 53 per cent to ₹19.7 crore versus the same quarter last year.
Yet, there has been an improvement sequentially. EBITDA and PAT increased by 41 and 261 per cent respectively when compared to the final quarter of FY23.
MCX would pay ₹250 crore for a period of six months beginning July 1 which is the minimum extension period — ₹125 crore per quarter. Comparatively, the company paid ₹81 crore per quarter for extension for the period between January and June; historically, MCX paid ₹15 crore per quarter. So, one can gauge from this how much cost the company is bearing to keep the existing platform running. Consequently, the profitability can be expected to take a considerable hit in the next two quarters as well.
What should investors do?
The transition to a new CDP is consuming more time than what the company originally anticipated, and the profits are being impacted due to this. However this is a temporary phenomenon.
Besides, MCX continues to be the market leader in commodity derivatives space and their business continues to grow. Therefore, once the migration to a new CDP happens, the one-time costs the company has been paying will no longer exist, translating to substantial improvement in profitability.
Hence, for the long-term, MCX remains a good investment opportunity givens its dominant position in India’s commodity derivatives trading. At present MCX accounts for over 95 per cent of commodity derivatives trading volume in the country. Investors can continue to accumulate the shares on dips. It trades at an one-year forward PE of 59. However based on FY25 EPS estimates (Bloomberg consensus), a year in which the company will not have the high technology cost over hang, its PE is relatively much cheaper at 27 times.