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The contrasting extremes: Further delay in new software platform implementation and surging options volumes

Multi Commodity Exchange (MCX)’s extension of services of its existing software vendor poses a challenge to our FY24 earnings expectations considering the impact is pegged at Rs3.5bn compared to normal annual software cost of Rs550- 600mn pre FY23. However, there has been a strong silver lining in rising options volumes which were at Rs745bn ADTV levels in Jun’23 vs Rs340bn in FY23. These contrasting extremes make us cut valuation multiples on account of weak execution in terms of software platform transition but earnings upgrade in FY25 due to higher options volumes assuming the complete transition happens by FY24 end. The ultimate event of transition is still pending, and hence, is an overhang. Maintain HOLD.

* Options volumes up sharply in Jun’23: MCX reported a sharp increase of 16% MoM in its options ADTV while futures ADTV dipped 7% MoM to reach future/option ADTV of Rs212/745bn in Jun’23. Within futures, strong growth reported in crude ADTV (up 14% MoM) was offset by sharp decline in gold ADTV ((-)28% MoM). Overall fall in futures ADTV was driven by sharp decline in gold volumes traded. Options ADTV crossed the Rs700bn mark for the first time in Jun’23. Gold ADTV after seeing a massive 222% MoM increase in May’23 declined 58% MoM in Jun’23, which was more than made up by a surge in silver (224% MoM), crude oil (22% MoM), and natural gas (25% MoM) in Jun’23.

* Expect Rs6.2/7bn revenue for FY24/25E. Based on Jun’23 run-rate, we expect FY24/25E futures ATDV at Rs215/240bn (earlier Rs230bn/250bn) while options ADTV is expected at Rs720/Rs820bn (earlier Rs450/500bn), respectively. With likely flattish trend in realisation (in line with management expectations of Rs20.8/mn for futures notional turnover and Rs450/mn for options premium turnover), we expect transaction revenue CAGR at 18% between FY23-25. Our options revenue factors premium turnover at ~1.9% of notional turnover in line with recent trends. Other operating income (which includes interest income on margin money) is expected to grow at 8% CAGR between FY23-FY25E.

* Expect EBITDA of Rs954mn/4.8bn in FY24/25E. We build in software cost expectations of Rs3.4bn for Q1-Q3FY24E per quarter and Rs50mn/200mn for Q4FY24/FY25E, respectively. Operating costs ex-software is built at Rs1.8/2bn for FY24/25E compared to Rs1.6bn for FY23. We deduct software amortisation cost (annual run rate estimated at Rs300mn) for arriving at PAT estimate of Rs1.1/3.8bn for FY24/25E.

* Risks include: Further delay in new software implementation, dip in volumes and competitive treats

* Maintain HOLD with target price of Rs1,430 (earlier Rs1,412 based on 20x (earlier: 25x) FY25E adjusted core EPS of Rs65.5 plus free cash of Rs120per share). We exclude investment income and add back software amortisation (considering additional non-cash amortisation is only during a limited time frame of 5-6 years and the investment outgo is already factored in our capex estimate of ~Rs1.5bn for FY24 and FY25) in calculating our core EPS after making tax adjustments. We factor in free cash and investments of Rs120/share after deducting SGF, margin money and mandatory reserves.

* Our key concerns that have led to a cut in multiples include: (1) Uncertainty in final transition to new software platform, (2) possible lower other operating income (Rs210mn in Q4FY23) post the implementation of blocked funds regulation even for secondary markets and (3) New regulatory changes, wherein all stock brokers are mandated to register their new clients on all the active stock exchanges after obtaining the trading preferences as per format which will be common for exchanges. For existing clients, the brokers are mandated to offer them access to all the active stock exchanges for the segments already opted by them, as a default mode, within three months and inform their clients through email/ SMS. These provisions are likely to come into force from 1 st Aug ‘23 (Link).

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