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October witnesses volume recovery; traction on new segments key for multiple rerating

The key question for MCX is its ability to recover volumes post the impact of higher margin trading norm and establish business traction on new products. Basis H1FY22 ADTV and October trend, we factor futures/options (notional) ADTV of Rs300bn/80bn in FY22E and Rs400bn/200bn in FY23E. We keep reiterating that ADTV recovery is not bound to be linear and MCX remains one of the better plays on commodity price volatility. However, without significant traction in optionalities yet, we have kept valuations unchanged. Downgrade the stock to ADD from Buy. Our revised target price stands at Rs1,965 (earlier: Rs1,890) based on 35x FY23E core EPS of Rs51.4 (earlier: Rs49.3) and free cash of Rs167 per share.

* Q2FY22 EBITDA largely in-line, notable increase in options volumes: MCX reported 5% QoQ (33% YoY) decline in turnover in Q2FY22 as it continues to see pressure on volumes due to implementation on peak margin norms. QoQ fall in ADTV has been driven by volumes as prices were up. Though ADTV* declined 8% QoQ to Rs261bn in Q2FY22, Oct’21 ADTV stands at Rs300bn. Higher margin requirement in futures has led to a volume shift towards options (mostly crude) which reported robust 217% QoQ volumes growth. MCX was able to increase its reach to 1,199 towns/cities in Q2FY22 vs 989 in Q1FY22 while number of unique client code (UCC) traded increased from ~7mn in Q1FY22 to 7.5mn in Q2FY22. Q2FY22 revenues dropped 5% QoQ (31% YoY) largely in-line with drop in turnover. EBITDA margins dipped 144bps QoQ to 40.6%. PAT/ core PAT came in at Rs327mn / 203mn, down 18% / 13% on QoQ basis and 44% / 55% on YoY basis, respectively.

* Electricity contracts get added to the already big basket of growth optionality. By the recent ruling, all long term power contracts can now be traded in exchanges. MCX has been working closely with IEX on electricity derivatives under a licensing agreement since October 2020 to use spot prices in IEX for linking the derivatives. MCX can launch such products quickly due to the already done work on the same. However, eventual market scoping data and the actual time to get decent volumes remain unclear. We have seen the long time taken in some of the new products like options and indices. Over the last 2-3 years, MCX has worked to expand distribution (new institutional partners, higher unique client codes) and introduced new products like options and indices whereas others remain work in progress like coal JV with Mjunction and gold spot. These continue to provide rich growth optionalities.

* ADTV estimate breakup: H1FY22/Oct-21 futures ADTV have been Rs272/300bn. We factor Rs327/300/400bn for H2FY22/FY22/23E, respectively. H1FY22 and Oct-21 options ADTV have been Rs40bn/90bn. We factor Rs119bn/80bn/200bn options ADTV for H2FY22/FY22/FY23E, respectively.

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