A new beginning
MCX has successfully executed one of the most complex technology transitions, and the new CDP is running smoothly, with volumes scaling new highs. We believe it’s a new beginning for MCX, with a focus on introducing new products, increasing participation and volume, and improving profitability. The options volume has increased by 4x YoY and is currently >INR 1,400bn. Options growth is driven by a surge in active UCCs, mobile trading, and higher activity in crude/natural gas contracts. The launch of new products like steel bars, index options, and shorter-duration options will further boost volumes. The launch of monthly contracts expiring every week (subject to regulatory approval) is expected to boost volume by ~50% as the expiry week constitutes ~40% of monthly volume. The objective is to reduce the tick size, which will boost retail participation. The options premium-to-notional ratio will decline gradually as we shift to shorter-duration contracts. We expect notional/premium volume to register a +77/58% CAGR over FY23-26E. We increase our EPS estimate by 8/13% for FY25/26E and increase multiple to 33x (vs 30x earlier) to factor in options volume surge and stable platform. We maintain our BUY rating with a target price of INR 3,650, based on 33x FY26E core EPS + net cash ex-SGF.
▪ Options driving growth: The options volume is scaling new highs every month, driven by crude and natural gas. Post the tech transition, the options volume is up ~1.5x and the launch of multiple new contracts will aid volume growth. Options notional ADTV in Q3FY24 stood at INR 945bn up 10/143% and options premium at INR 19.35bn was up +23/97% QoQ/YoY. As per sensitivity, a ~10%/10bps increase in options volume/premium-to-notional ratio boosts EPS by ~8/5%. We expect the options premium to reach INR 32.15bn in FY26E, which assumes growth of ~58% from the Dec-23 level. Options will account for ~65% of total revenue in FY26E (vs 34% in FY23). Algorithmic/mobile trading constitute 54/31% of options volume while proprietary/client is 54/45%, and FPI/DII volumes are negligible.
▪ New products and shorter-duration contracts are growth drivers: The derivative volume in equities is dominated by shorter-duration contracts and retail/client/proprietary traders. The regulator does not allow very shortduration contracts in commodities; thus MCX will launch (subject to regulatory approval) multiple monthly contracts which will expire every week. Based on our analysis, the expiry week volume is ~1.5x of the monthly average and four expiries in a month will boost volumes by ~50%. Index options is the most popular derivative product and can be a tool to scale bullion options volume.
▪ Valuations and view: MCX is up ~95% in the last 6M led by tech transition and volume surge. The stock has traded at an average one-year fwd P/E of ~31x and currently trades at a P/E of 34/27x FY25/26E EPS. The uncertainty regarding the change in top management and new product launch timeline is temporary and focus will eventually shift to volume growth, improving profitability and return ratios.
