New products are the key growth drivers.
MCX will be looking to grow volumes driven by new products, such as Steel Bar (launched), Gold Serial contracts, and Power contracts. Once the future volumes on these products exceed the threshold of INR8-10b (one-year average ADTO) options, contracts will also be launched.
Retail participation in the Indian commodities market (1.4m UCCs) is low when compared to equity market participation (40m NSE active clients). Strong technology-based offerings from discount brokers, along with lower ticket-size contracts from MCX, can improve participation significantly.
FPIs, last year, received approval from the regulator to invest in cash-settled commodities. In a follow-up to the same, MCX has launched its direct market access (DMA) facility for Category-I FPIs. Once the same is available to Category –II FPIs, we believe, the volume momentum will pick up notably.
Regulatory measures, such as interoperability of margins between stock exchanges and commodity exchanges, allowing partial withdrawal of SGF or determining clients' margin requirements on net positions, if implemented, have the potential to further boost volumes.
With all the aforementioned factors and high volatility persisting 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 at INR1.2t). Our sensitivity analysis yields a 7% rise in EPS for every INR100b additional ADTV in the options segment.
Upon completing the successful software transition to TCS software, cost savings will be realized. This will lead to a marked improvement in profitability.
MCX was embroiled in a software transition from 63moons to TCS over the past couple of years. With the completion of this transition, the management's primary focus is now directed towards scaling up the business.
We expect MCX to deliver an FY24-26 revenue/EBITDA/PAT CAGR of 28%/ 205%/157%, fueled by a 47% CAGR in options volumes.
We upgraded the stock to BUY from Neutral with a TP of INR4,500 (premised on 36x FY26E EPS).
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