MCX: Time to Evaluate Options?

Posted on by

In our bl.portfolio edition dated June 25, 2023, we had recommended that investors accumulate the stock of MCX as it is a market leader in the business, was about to see a turnaround in profitability and the risk-reward appeared favourable.

Since then, the business of the company has continued to improve and profits have zoomed as it successfully transitioned to its new Commodity Derivatives Platform, resulting in lower technology costs. Share prices have kept pace too, with shares up 271 per cent in 15 months.

While business prospects remain good, much appears priced in. Given the cyclical nature of business, we believe it is time for investors to lock in on the gains and book profits.

Business performance

Multi Commodity Exchange (MCX) (₹5,805.2) provides a marketplace for commodity derivatives trading, enabling price discovery and risk management. The company is near monopoly, as it garners over 90 per cent market share in commodity trading volume.

While the volume in options continues to witness a steady increase, the futures volume too has started improving now. In Q1FY25, the average daily turnover (ADT) (notional) in options went up 137 per cent to ₹1,46,771 crore compared with ₹61,928 crore in Q1FY24.

Interestingly, the ADT of futures, which has been in a decline since FY21, saw a change in trend – it expanded 21 per cent to ₹25,985 crore in Q1FY25 versus ₹21,413 crore in Q1FY24.

Futures volume was powered by an increase in trading volume of bullion. In Q1FY25, ADT of bullion stood at ₹17,800 crore compared with ₹12,919 crore in the same period of the last fiscal, marking an increase of 38 per cent.

In the options segment, energy remained the largest contributor by recording an ADT (notional) of ₹1,24,506 crore in Q1FY25 against ₹54,823 crore in Q1FY24.

Earlier, the surge in options volume contributed significantly to the revenue. With a potential turnaround in futures volume, the company is expected to get an additional boost in income going forward.

Financials

Operating income, which went up 33 per cent to ₹684 crore in FY24, continued to post growth in the first quarter of the current fiscal. In Q1FY25, the income from operations improved nearly 61 per cent year on year to ₹234 crore.

As the costs related to technology decreased, EBITDA expanded a whopping 386 per cent to ₹151 crore (EBITDA margin at 65 per cent) in Q1FY25 compared with ₹31 crore in the same quarter to last year. Similarly, net profit rose 464 per cent to early ₹111 crore (margin at 47 per cent) in Q1FY25 versus about ₹20 crore in Q1FY24.

So, the continuous improvement in performance led to a sharp rally in the stock price.

Why book profits

When we gave our accumulate call on MCX in June 2023, the stock was trading at one-year forward PE of 34 times. Besides good business prospects, there was also another added lever of profit growth from lower technology costs once the company transitioned to new CDP.

Now with that behind, the second lever is not available anymore. Today, trading at 54 times one-year forward PE, at an almost 60 per cent premium to five-year historical average of 34 times, optimistic business growth prospects appear fully priced in, leaving low margin of safety.