Mumbai: The MCX stock has seen an impressive surge of 17% in just 14 sessions since it migrated to TCS’ Commodity Derivatives Platform (CDP). Earlier, due to the delayed implementation of the platform, the growth benefits to the exchange were being absorbed by its former vendor, 63 Moons. However, after the migration, investors have priced in the growth benefits accruing from the new platform which has led to the surge in the stock price.
The MCX share price jumped to ₹2,566 on 6 November from ₹2,197 on 16 October, the day the TCS platform began being used to run, clear and settle trades for 300 active member brokers through which lakhs of clients trade.
As the platform couldn’t be installed by September last year, due to problems cropping up during the trial runs , the dramatic cost escalation began to eat into the bourse’s bottom line.
The consolidated net profit which stood at ₹51.18 crore in Q2 FY23 plunged to ₹34 crore in Q3 , ₹12 crore in Q4 and ₹24 crore in Q1, the last down 28% from a year ago. This was because each quarterly extension from September end last year through October 2023 cost MCX ₹472 crore totally, almost eight times the annual fee payable to 63 Moons under the previous contract which ended in September 2022.
Now that this cost overhang has been lifted with the successful migration, the markets are discounting the benefits of increased turnover accruing to MCX with rising costs of commodities like crude, gold and natural gas.
“MCX was in a growth phase even before the migration, but the benefits of that were being swallowed by huge payments made to 63 Moons,” said Shyam Sekhar, founder of ith-ought, a Securities and Exchange Board of India (Sebi) registered investment adviser. “Now, with the new vendor platform having stabilised, the effects of that growth phase will play out over the next two-three quarters. The rising price of inputs will result in increasing number of actual users hedging themselves on the platform, where currently the skew between speculation and hedging is tilted in favour of the former.”
To be sure, a risk is that a rival like National Stock Exchange (NSE) or BSE “ups the ante” in their own commodity segments, causing a threat to MCX, said Sekhar. But he added that would be a “veritable” challenge for either contender.
This is evident in Sebi data which shows MCX enjoyed market share of 99.14% in September compared to its rival NCDEX’s 0.8%, NSE’s 0.03% and BSE’s zero volumes.
Though the commercial details of the TCS deal remain secret, it involves a 5-year annual maintenance contract and a 1-year warranty period, according to a group investor call transcript hosted by UBS Securities in June. In the same group call, figures of 6-7% of topline are cited as being the annual maintenance plus amortization costs, which is approximately half of the 13-15% of topline spending that went toward technology costs in the past.
The absence of a variable charge linked to the exchange turnover, as with 63 Moons, will lead to substantial savings which will be reflected in the bottom line so long as exchange turnover keeps growing.
Another benefit being priced in by markets is the potential launch of shorter duration options contracts in items like crude and natural gas which will attract more retail participation, according to Kishore Narne, director, Motilal Oswal Financial Services.
“Weekly contracts are being planned in crude and natural gas , that could attract retail in a big way as observed in weekly Nifty, Bank Nifty and Sensex contracts,” said Narne
Global brokerage UBS recently increased its 12-month price target on the stock to ₹3,000 from ₹2,100, saying that it expects a potential re-rating on the stock with its revised price target based on 35 times FY26 earnings .
It added that competition concerns were overdone citing new energy contracts launched by NSE . “NSE ADV (average daily volumes) for energy products was less than ₹1 billion (WTI Crude Futures at ₹0.05-0.6 billion and options at ₹0.4-0.5 billion) over the past few months. No volume was registered for other new products launched on the NSE commodity platform. We expect MCX to maintain its leadership in commodity trading by attracting volume with better liquidity . We will continue to track volume closely to assess potential competitive risk.”
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Updated: 06 Nov 2023, 10:35 PM IST