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Options, software cost savings to drive earnings

MCX has reported strong Q4FY22 result with EBITDA of Rs500mn vs Rs1.6bn for FY22. We expect the company to clock PAT CAGR of 30% between FY22-24 driven by (1) growth in options and (2) cost savings with setting up of new software platform with TCS. Our estimates factor in overall ADTV (futures + options) of Rs550/600bn in FY23/FY24 which has already grown from Rs342bn in FY22 to Rs459bn in FY23-TD (data up to 16th May’22). We factor in total software-related cost and additional depreciation of Rs300mn in FY24 vs Rs600mn run-rate as seen in FY18-21. We believe both these estimates are conservative. We upgrade the stock to BUY from Add with a revised target price of Rs1,715 (earlier: Rs1,650) based on 35x FY24E core EPS (rolled over from FY23/24E) of Rs43.6 and free cash of Rs181 per share.

ADTV growth is driven by options. The rise in options ADTV from Rs50bn in May’21 to Rs250bn in May’22 is quite structural despite the benefits of lower margin compared to futures and overall high volatility in commodities. This has happened while the futures ADTV has remained range bound between Rs250bn and 280bn. In fact, the expectation always was that options will outgrow other segments in commodities akin to what we have seen in case of equities. The option revenue is derived as a fixed percentage of premium turnover which is a percentage of notional turnover depending upon volatility, contract durations and other usual parameters. As such, the same option notional turnover can contribute more to revenue (as seen in Q4FY22) if the premium to notional turnover increases. This is an important point to consider given Q4FY22 options premium turnover as a percentage of notional turnover increased to 2.7% from 2.1% in Q3FY22. Unique client codes using options have increased meaningfully from 42.5k in FY21 to 170k in FY22.

Commodity Derivatives Platform integration with TCS is on expected timelines – it should help create significant savings: Mock testing has happened successfully and the management will once again review the same in June’22. Q4FY22 saw an increase in CWIP which was largely due to the costs involved in CDP project. New platform will not have any variable costs but only fixed cost components like annual maintenance charges. Between Oct’22-Oct’23, CDP will be under warranty and hence, no additional cost will be incurred for the same. The depreciation and certain other costs would be higher on account of this system. However, there will be significant overall savings once it is established. We factor in total software cost and higher depreciation of Rs300mn in FY24 (first full year of new system) vs usual cost of Rs600mn in a year.

Risks include: A few regulatory changes have impacted MCX ADTV in the past. Additionally, MCX’s turnover is highly concentrated within few commodities (Crude options ADTV contributed 75% of total ADTV in FY23TD), therefore any sudden change in market conditions can impact volumes and this makes it difficult to forecast. Futures ADTV had witnessed a decline between FY20-22.

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