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Software transition remains key; options maintains momentum

Multi Commodity Exchange (MCX) has reported Q4FY23 EBITDA of Rs21mn, being impacted by higher software cost. Increasing options volumes have been the key investment thesis for the company and Q4FY23 saw this trend continuing as options ADTV (notional) touched an all-time high of Rs550bn in Mar’23. Higher software cost may continue in Q1FY24 based on the existing agreement with former software vendor 63 Moons. As per the current plan, if the software is implemented by the start of Q2FY24, it can lend significant operating leverage to the company. Continued traction in options volumes along with new lower size contracts could aid revenue growth going forward. However, impact of lower software cost could potentially lift EBITDA, which will likely be partially offset by increased amortisation expense. The ultimate event of transition is still pending, and hence, is an overhang. Maintain HOLD.

* Revenue growth lagged growth in overall volumes: MCX’s futures ADTV dipped ~15% QoQ which was offset by strong options ADTV (notional) growth of 16%, resulting in 4% growth in overall turnover. Operating revenue declined 6.8% QoQ (split between futures dip of 15%, other operating revenue dip of 5% and options revenue increasing by 1%). Options premium turnover as %age of notional turnover dipped to 2.2% in Q4FY23 vs 2.70% in Q4FY22, 2.57% in Q1FY23 and ~2.5% in Q2/Q3FY23.

* Encouraging trends seen in Q1FY24-TD: As against Q3FY23 future/options ADTV of Rs202/450bn, Q4FY23-TD ADTV stands at Rs214/563bn, respectively.

* Operating performance impacted by lower revenue growth: Dip in revenue (Rs100mn QoQ) resulted in adjusted EBITDA of Rs715mn in Q4FY23 vs Rs823mn in Q3FY23 (adjusted for higher software cost). Other than software cost, employee cost / other operating costs increased by 2.2/2.5% QoQ, respectively.

* Operational highlights: Total members in Q4FY23 dipped to 548 from 590 in Q3FY23. Number of authorised persons declined to 50,228 in Q4FY23 from 51,783 in Q3. Number of UCC have declined sharply by 10% QoQ to 9.5mn; however, number of UCC traded as %age of total UCC has increased from 3% to 3.5% during the same period. FPIs have started gaining some traction on MCX platform as FPI futures ADTV in May’23 stood at Rs0.6bn and options ADTV stood at Rs0.2bn.

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