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Options turnover sustains momentum

Volume rise in options has been our consistent investment thesis on Multi Commodity Exchange of India (MCX). Options ADTV has crossed Rs400bn as of the first 16 days of Sep’22 (Sep’22-TD) from Rs78bn in Sep’21. This rise can be attributed to steady recovery from the impact of peak margin norms from Sep’21 and continued volatility in commodity prices. Options volumes can maintain the current momentum with the expected launch of new products such as gold monthly options with gold (1kg) futures as the underlying asset. Based on volume trends, MCX could report 28% QoQ growth in operating profits in Q2FY23E. Strong industry position rules out any cut in multiples. Hence, once the gain from rising options volumes outweighs the decline from lower futures volumes, the ensuing growth in earnings will add significant upside to the stock. MCX seems to be in that zone currently with options growing and futures volumes remaining steady. Maintain BUY.

* Options ADTV exceeds Rs400bn: Sep’22-TD options ATDV stands at Rs416bn, up 34% MoM. The sharp jump was driven entirely by 43% MoM growth in the ADTV of crude options. Even if we are to adjust for the typical mid-month spike in options volumes, fullmonth Sep’22 options ADTV could be Rs375bn. This implies Q2FY23E options ADTV at Rs320bn, up 61% QoQ.

* Dependence of options on crude can reduce with more product launches. Crude options ADTV as a percentage of overall options ADTV declined from the high of 90% in Jan’22 (when the natural gas contract was launched) to 74% in Jul’22, and has increased to 81% in Sep’22-TD. This can substantially shrink with the likely launch of new products such as the monthly 1kg gold options (link).

* Futures ADTV remains range-bound: Sep’22-TD ADTV stands at Rs240bn, up 7% MoM. The sequential improvement is being driven by sharp increase in bullion turnover. Assuming Rs240bn ADTV for the rest of Sep’22, Q2FY23E futures ADTV works out to Rs234bn, down 8% QoQ.

* Q2FY23E EBITDA likely to increase by 28% QoQ: Based on our estimates, futures turnover may decline 5% QoQ. Futures revenue is estimated at Rs634mn (assuming a blended rate similar to that in Q1FY23). Options turnover is expected to grow 67% QoQ and we forecast options premium to remain at 2.6% (similar to the Q1FY23 rate). This will result in options revenue of ~Rs480mn. Other operating revenue is likely at Rs130mn. We estimate total revenue to rise 14.5% QoQ to Rs1,245mn. Total expenses may be up 3.3% QoQ at Rs630mn leading to 28% growth in EBITDA and ~500bps expansion in EBITDA margin to 50.6%.

* Maintain BUY. Our estimates factor-in options/futures ADTVs at Rs240bn/270bn for FY23E and Rs260bn/305bn in FY24E. Options ADTV has grown from Rs80bn in FY22 to Rs255bn in FY23-TD (data up to 16th Sept’22) while futures ADTV has declined from Rs262bn to Rs245bn during the same period. This indicates room for earnings upgrades if the current momentum continues. Maintain BUY with an unchanged target price of Rs1,700, based on 35x FY24E core EPS of Rs43.4 and free cash of Rs181 per share.

* Risks include sudden drop in overall volumes with the decline in prices of key commodities (like Crude Oil) and elevated software expenses.

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