In a recent update, leading brokerage firm UBS has reaffirmed its “buy” rating for Multi Commodity Exchange of India (MCX) and increased the target price to Rs 2,100 per share, up from the previous Rs 1,950 per share. This decision comes as UBS revises its earnings estimates for MCX, projecting a 26% growth for the fiscal year 2024, along with a 3-6% increase for FY25-26. These upward revisions are attributed to strong options trading performance and improved operating leverage, following a one-time software cost associated with 63 moons in Q2-Q3 FY24.
UBS’s recent report highlights the robust options trading in India, with an average daily value (ADV) ranging from Rs 870-890 billion during August to September 2023. This surge in trading activity has been driven by the energy sector and enhanced performance in bullion products. Notably, the Options ADV for the second quarter of FY24 reached Rs 794 billion, marking a significant 28% quarter-on-quarter (QoQ) increase and an impressive 150% year-on-year (YoY) growth. Furthermore, August 2023 exhibited more balanced trading volume distribution, indicating improved long-term liquidity. While a slight decrease in the premium to notional ADV ratio is expected in the short term, the report anticipates revenue growth at 6.5% QoQ and 22% YoY.
MCX recently reported the resolution of trading procedure issues, the completion of the final code freeze, and the resumption of daily mock trading on the new platform starting from September 1. The company aims to complete this technological transition by the end of September 2023 and foresees no challenges in introducing contracts for January 2024.
In its note, UBS emphasized, “Tech transition has been an overhang for a while, so completion of the process and stabilisation of the new platform is the key near-term trigger, in our view.”
In other developments, media reports have indicated that the National Stock Exchange (NSE) plans to introduce energy commodity options, including Crude oil and Natural gas, in October 2023, based on underlying futures launched in May 2023. NSE’s WTI Crude Futures have recently witnessed an average daily value of approximately Rs 0.3 billion.
The UBS report expressed confidence, stating, “We are less worried because the leading exchange usually attracts the most trading volume, ensuring better liquidity. We are monitoring this closely to observe volume trends and the impact of the options launch.”
Investors and market participants will be closely watching MCX’s performance and the evolving dynamics of the commodities market in the coming months, as these developments are poised to have a significant impact on the financial landscape.
