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Option volumes showing strong promise

Volume rise in options has been the consistent investment thesis for Multi Commodity Exchange of India (MCX). Options ADTV rose sharply from Rs198bn in Q1FY23 to Rs313bn in Q2FY23. The same in Oct’22 / Nov’22 inched up further to Rs315bn / Rs413bn. Futures ADTV remained range-bound during the same period declining from Rs255bn in Q1FY23 to Rs238bn in Q2FY23 and rising to Rs260bn in Nov’22 (attributable to steady recovery from the impact of peak margin norms w.e.f. Sep’21, and continuous volatility in commodity prices). Options volumes can maintain the current momentum with the launch of new products – such as gold monthly options with gold (1kg) futures as the underlying asset (launched on 14th Oct’22) (Link). MCX reported strong EBITDA growth of 33% QoQ in Q2FY23 as strong options volume growth resulted in operating leverage benefits. Growth in options, stable futures volumes and reduction in software cost post migration to new platform enliven prospects for FY24E. Maintain BUY.

* Composition of options volumes: MCX reported an Options ADTV of Rs413bn, up 31% MoM, in Nov’22. Gold / silver ADTVs grew 156% / 139% MoM while natural gas / crude oil grew 48% / 20%. On FY23-TD basis, crude oil / natural gas contributions continue to be high at 74% / 20% while gold / silver option volumes account for 4.2% / 1.2% of overall volumes.

* Composition of futures volumes: MCX futures ADTV grew 11% MoM to Rs262bn driven by strong growth in silver and energy ADTV. Silver ADTV grew 19% while the same for crude / natural gas grew 16% / 18% MoM. Increase in futures ADTV was volume-driven. On FY23-TD basis, natural gas and silver are contributing 25% each to overall volumes while gold / crude oil / base metals are contributing 18% / 16% / 15.8% respectively.

* Dec’22-end readiness to migrate to new software platform is critical: In Q2FY23, management sounded confident of transition to new software by the end of Q3FY23. User acceptance testing (UAT) had started for the new commodity derivatives platform (CDP). However, the cost of extension with 63 Moons has been exorbitant and management has indicated that the cost will be very high and will impact Q3FY23 results.

* Maintain BUY. Our estimates factor-in upgrade in FY24E ADTV estimates for both Futures and Options. We now factor FY23E / FY24E futures ADTV of Rs260bn / Rs280bn (H1FY22: Rs242bn, Nov’22 Rs260bn) and options ADTV of Rs295bn / Rs400bn (H1FY22: Rs355bn, Nov’22: Rs413bn). Accordingly, we estimate total revenues of Rs4.6bn / Rs5.2bn in FY23E / FY24E. We expect total operating expenses of Rs2.4bn in FY23E taking into account the Rs200mn additional one-time expense towards software (our estimate) due to extension of contract with 63 Moons. Our total operating expenses estimate for FY24E stands at Rs2.3bn (includes advantage of lower software costs). Accordingly, we estimate EBITDA margin of 46% / 56% in FY23E / FY24E respectively. We expect core PAT of Rs2.3bn in FY24 (CAGR of 27% between FY22-FY24E driven by lower software costs). Maintain BUY with a target price of Rs1,795 (earlier: Rs1,700) based on 35x FY24E core EPS of Rs46 and free cash of Rs184 per share.

* Key risks: Sudden drop in overall volumes with decline in prices of key commodities (e.g. crude oil), and elevated software expenses

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