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New products to be key growth drivers

* MCX plans to grow volumes by launching new products, such as serial contracts, index options, 10g monthly gold futures, cotton seed wash oil, crude sunflower oil contracts and many more in the pipeline. After future volumes on these products exceed the volume threshold of INR10b, MCX will launch options contracts.

* For MCX, retail participation has increased to ~0.9m participants. Retail participation can strengthen further with new product launches, a change in the transaction rate structure (under true-to-label charges regulation) to make it favorable to traders, strong technology-based offerings from discount brokers, and lower ticket-size contracts from MCX.

* FPIs are showing good traction. MCX currently has around 100 FPIs actively trading on its platform, of which around 90 belong to the CAT I category and 10 to CAT II. With the launch of its direct market access (DMA) facility, along with regulatory support and rising participation, MCX expects strong volume growth.

* Regulatory measures, such as true-to-label charges and the pass-on of interest earned on clearing corporation, will not have much impact on the company’s profitability. True-to-label charges have to be implemented and all exchanges have to charge flat fee from 1st Oct’24.

* With all the aforementioned factors and high volatility in the energy basket, we expect ADTV in the options segment to increase to INR1.5t in FY25 from INR940b in FY24 (4QFY24 ADTV was INR1.2t). Our sensitivity analysis yields a ~9% rise in EPS for every 10% rise in ADTV in the options segment or a 10% rise in the options segment’s realizations.

* From 1st Oct’24, MCX will start paying the AMC to TCS, which will be fixed in nature, causing no volatility like the previous quarters. This will lead to a marked improvement in profitability. MCX has not charged any penalty to TCS so far. With the completion of this transition, the management's will now focus on scaling up the business.

* We expect MCX to deliver a CAGR of 31%/ 154%/119% in revenue/EBITDA/PAT over FY24-27E, fueled by a 56% CAGR in options ADTVO. We reiterate our BUY rating on the stock with a TP of INR6,500 (premised on 42x Sept’26E EPS).

New products and variations to existing ones to drive volumes

* MCX is preparing to introduce weekly contracts, which are currently undergoing extensive back-testing prior to the submission to SEBI for approval. This rigorous testing process is essential to ensure the new product operates on the new system without any technical issues.

* It is also looking forward to launch 10g monthly gold contract, which was delayed as it was under the testing phase. It is quite similar to the existing 8g monthly gold contract, which MCX does not plan to discontinue. Both the contracts will run simultaneously. The 10g gold contract will be launched in the future segment first and then in the options segment after it meets the INR10b volume threshold.

* Products like crude sunflower and cotton-seed wash oil futures will take at least 5-6 years to mature and contribute good volumes.

* Currently, MCX will focus more on launching the products that are similar to the existing products.

* The mini base-metal contract, which was launched recently, is trading at the same level as the main contract and contributing ~10% of the main contract.

* For the index options contract, it is still in the testing phase and MCX will focus more on other existing product launches in the near term. But this would be a huge contributor as MCX would be the first exchange in the world to launch such a product. Accordingly, demand for such products would boost volumes.

Impact of SEBI regulations

* As per the exchanges circular, the true-to-label charges regulation will have to be implemented from Oct’24. Under this regulation, the current slab-wise structure of transaction charges has to be moved to a flat fee model. MCX will announce new charges before the implementation date and after taking approval from the board of directors and the regulator.

* As per the circular, the charges have to be in sync with the current net realizations of the exchanges; hence, we do not estimate any hit on revenues. Nevertheless, with only few traders getting benefits of lower realizations, volumes could increase.

* SEBI recently released a consultation paper wherein it has recommended the pass-on of interest income earned on funds for clearing and settlement to end customers. The implementation will be challenging given that identifying the true color of money will be a herculean task at every client level.

* Even if it is implemented, the impact on MCX will not be material. In FY24, the exchange earned INR400m of interest income on clearing and settlement funds. Furthermore, as per our understanding of the consultation paper, only income earned on idle funds would be required to be passed on to customers.

* Faster approvals for new products and variants of existing products can reduce the lead time for MCX.

MCX volumes remain strong in Aug’24; both futures and options

* Overall ADTO increased 10.3% MoM to INR2.2t in Aug’24, aided by a 10.4% increase in options ADTO.

* The volumes have started to pick up notably in futures ADTO (up 9.6% MoM in Aug’24 to INR272b) after two consecutive months, mainly driven by 16.3%/32% MoM increase in Silver ADTO/Natural Gas ADTO.

* Options ADTO grew 10.4% MoM in Aug’24 to INR1.9t, led by 10.5%/20.7%/268% MoM increase in Crude Oil ADTO/Natural Gas ADTO/Silver ADTO.

* Over FY24-27E, we expect a CAGR of 50% in overall ADTO, 15% in futures ADTO and 56% in options ADTO.

Good traction in FPI participation

* During the year, MCX has started the process of offering DMA to foreign portfolio investors (FPIs) registered with the market regulator to trade in cashsettled contracts.

* They are currently allowed to trade in only two commodities, Crude Oil and Natural Gas. When the list is expanded, the contribution from FPIs will improve (currently contributes around 1% of the overall trading volume).

* It has been only a few months since FPIs have actively started trading on the MCX platform and there is healthy traction from this segment. MCX expects more and more participation going ahead.

* MCX currently has around 100 FPIs actively trading on the platform, of which around 90 belong to the CAT I category and 10 to CAT II.

* The key target audience for FPIs would be high-frequency traders and FPIs with exposure to commodities in Indian currency.

Software transition: Fixed costs to kick in from Oct’24

* Over the past couple of years, MCX has been embroiled in transitioning its core operating software from 63Moons to TCS. This transition impeded the launch of new products and demanded extensive management attention. Additionally, due to the necessity of extending the contract with 63moons thrice, MCX’s costs escalated significantly.

* In Oct’23, the company successfully completed its transition and the software has been operating smoothly. This is evidenced by the significant increase in volumes to pre-transition levels.

* At the current volumes, we expect the costs (AMC + depreciation) to be lower than the normal run rate in the pre-transition phase. While there will be no AMC costs until 2QFY25, a fixed AMC cost will kick in from 3QFY25 with no linkages to volumes.

* Back-testing the new products on the new software is key to a glitch-free implementation. So far, new product launches have not seen any major issues.

Premium to notional turnover improving

* The premium turnover to notional turnover ratio declined from 2.05% in 3QFY24 to 1.44% in Jul’24. However, it recovered to 1.77% in Aug’24, led by a surge in volumes in gold, silver and natural gas.

* In our assumption, we previously built 1.55% for FY25 and 1.47% for FY26. We now increase the ratio to 1.65%/1.6% for FY25/FY26, resulting in an increase in our EPS estimates by 6%/8%.

Valuation and view – Maintain BUY

* We expect MCX to deliver a CAGR of 31%/154%/119% in revenue/EBITDA/PAT over FY24-27E, led by a 56% CAGR in options volumes. We highlight several near- to medium-term drivers of volume growth: 1) new product launches - index options, 10g monthly gold futures, cotton seed wash oil, crude sunflower oil contracts and many more in pipeline; 2) continued volatility in key commodity prices (gold, crude oil & natural gas) amid global uncertainties; and 3) a rise in retail participation in the options market. We expect no impact from competition on MCX's volumes, as similar products are currently available on other exchanges. With the technology overhang behind MCX and near-term potential drivers in place, we see meaningful re-rating potential. We reiterate our BUY rating on the stock with a TP of INR6,500 (premised on 42x Sept’26E EPS).

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