Multi Commodity Exchange (MCX) (₹1,563.35), India’s first listed exchange, provides a marketplace for commodity derivatives trading, enabling price discovery and risk management. The company is a near monopoly as it garners over 95 per cent market share in commodity trading volume in the country.

Through its wholly-owned subsidiary Multi Commodity Exchange Clearing Corporation Limited (MCXCCL), the company also provides settlement and clearing services. It guarantees settlement of all trades via a Settlement Guarantee Fund (SGF).

While the company’s fundamentals are strong, a temporary setback it is facing recently is the delay in transition to a new Commodity Derivative Platform (CDP), a backend platform that enables all the trading activity. This has significantly weighed on profits, of late.

MCX was expected to migrate to the new CDP by December last year, which was postponed to June 2023. But as it stands, further updates are awaited.  However, the eventual shift to new CDP, developed by Tata Consultancy Services (TCS), will immediately remove this cost, translating to higher profits.

At current price of ₹1,563, MCX is trading at a one-year forward PE of 34 times, which is at a 16 per cent premium to its five-year average of 29 times. At the same time, the earnings growth prospects are also good, with FY23-25 earnings CAGR estimated (Bloomberg consensus) at 41 per cent. Besides, the company appears well-positioned to maintain its leadership position in the business. So, given the robust long-term growth prospects which balance the valuation premium., we recommend that long term investors with risk appetite accumulate the stock on dips. Successful shift to new CDP could be an upside catalyst.

The closest peer to MCX is BSE Limited (although nature of business is different), a listed stock exchange. BSE trades at one-year forward PE of 31 times, which is at a 54 per cent premium to its five-year average of 20 times. Its FY23-25 earnings CAGR is estimated at lower 14 per cent..

Business

MCX offers futures and options contracts on various commodities. While it offers derivative contracts on bullion, energy, base metals and agricultural commodities, the first three contribute the maximum to the revenue and MCX’s market share in these categories is between 98 and 100 per cent. Futures contracts based on commodity indices are also on offer. 

Key participants include the ones that are looking to manage price risk, arbitrageurs, speculators, and industry participants who take delivery of the commodity from the exchange.

The exchange generates revenue through transaction charges that are directly proportional to the level of market activity. So, MCX makes money as long as participants continue to trade, similar to stock exchanges.

That said, in the last three financial years, there has been a steady drop in volume of future contracts, in terms of value as well as number of lots (refer table for data). Regulatory developments such as peak margin rules, increased contract size due to sharp price rally leading to further increase in margin obligation of participants and making all futures, except energy, compulsory delivery contracts hit the trading activity.

Unaffected by the above, the option trading volume has shot up significantly in the last two fiscals. Particularly in FY23, the jump was so substantial that the company posted a growth in overall turnover, both in terms of volume and number of lots traded, for the first time in the last three years. Revenue also increased last year, after falling in the preceding two fiscals.

So, there could be a structural change happening in the revenue mix for the company, going ahead, where the options are expected to bring in more revenue than futures. Nevertheless, the contract value of futures has dropped following the recent fall in prices and so, a pick-up in futures turnover will not be a surprise.

Turnaround

Revenue increased by 34 per cent year-on-year to hit a multi-year high of nearly ₹581 crore in FY23, driven by a 45 per cent increase in the combined number of lots in futures and options traded. However, net profit saw only a marginal 4 per cent increase to ₹149 crore as the company had to shell out ₹162 crore to continue to use the existing platform, provided by 63 Moons Technologies, until June this year. Fifty percent of this payment pertained to Q4FY23 and this negatively impacted FY23 profits by ₹ 81 crore. Historically, MCX has paid ₹15 crore per quarter. This explains the magnitude of its impact on profitability.

In FY21 and FY22, the net profit saw a decline because of the lower revenue due to the drop in futures trading volume. In spite of this, MCX was able to maintain a healthy margin. For instance, EBITDA and PAT margin in FY23 stood at 37 and 25 per cent respectively, reflecting good efficiency in operations.

There are risks, going ahead, especially with respect to CDP and also, the valuation might appear on the higher side. Any downturn in the commodity cycle can also pose risk.

However, MCX continues to be the leader in commodity derivatives space and the core business is stable with strong growth potential in the long term. With the impact on volumes due to regulatory impact largely overcome and behind now, and shift to new CDP a matter of time, the risk-reward is favourable.

Why
Well-positioned to maintain leadership position
Business seeing a turnaround
Risk-reward favourable
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