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Options traction positive; migration on time by June 2023

About the stock: MCX is the leader in commodity derivatives exchanges in India with ~96.8% market share in terms of commodity futures turnover.

* It has ~100% market share in precious metals, base metals and energy

* Presence in various commodities offers healthy diversification

Q4FY23 Results: Anticipated elevated software expenses marred earnings.

* Average daily futures turnover (ADTO) declined ~22% YoY to | 20632 crore due to a decline in base metals volume

* Option ADTO was healthy at | 45710 crore, up ~3x YoY, 16% QoQ

* Operational revenue declined 6.8% QoQ; other income was flat QoQ

* Earnings at | 5.4 crore; down 85.1%, due to elevated software related expenses

What should investors do? Market leadership with continued traction in options seen driving topline, earnings. New product initiatives are lined up though regulatory approvals are awaited. Delay in launch of new platform acted as overhang; management seems confident of completing implementation by June 2023.

* Thus, we maintain our BUY rating on the stock

Target Price and Valuation: We value MCX at ~25x core FY25E EPS plus net cash (ex-SGF) and revise our target price to | 1650 from | 1700

Key triggers for future price performance:

* Software migration overhang to be over as the management is confident of completing the migration by June 2023

* Robust traction in options volume expected to continue. Launch of several mini contracts will aid overall volume growth and revenues

* New product launch/initiatives - electricity contracts, option gold contract to drive valuation further; awaiting regulatory approval

Alternate Stock Idea: Apart from MCX, in our coverage we also like HDFC AMC.

* HDFC AMC is among the largest and profitable mutual funds with an QAAUM of ~| 4.4 lakh crore

* BUY with a target price of | 2050

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