Motilal Oswal upgrades MCX to buy on plans to drive volumes, raise retail participation, sees 15% upside

MCX will be looking to grow volumes driven by new products, said Motilal Oswal.

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As the Multi Commodity Exchange (MCX) seeks to drive volumes with new products, domestic brokerage Motilal Oswal bumped up its rating on the stock to a ‘buy’.

Motilal Oswal issued a target price of Rs 4,300 per share, implying an upside of 15 percent from the previous session’s closing price.

MCX is looking to grow volumes with new products such as steel bar, gold serial contracts, and power contracts. “Once the future volumes on these products exceed the threshold of Rs 8oo-1,000 crore (one-year average average daily turnover) options, contracts will also be launched,” said Motilal Oswal.

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Additionally, around 90 percent of the current volumes in the options segment are from the crude oil and natural gas segments. MCX could launch smaller contracts and weekly expiry products in the bullion segment, which will boost volumes.

The exchange is also looking to launch power future contracts, which are unavailable in the market at present. “The approval for these contracts rests with Sebi and the CERC. Considering the interest from private companies looking to sell their surplus captive power generation, there is substantial potential for these contracts,” said Motilal Oswal.

Some regulatory measures can help boost participation for MCX. If the regulator allows interoperability of margins between stock exchanges and commodity exchanges, brokers can help customers trade in commodities without the requirement of moving margins.

The domestic brokerage also noted that there is significant headroom for growth in retail participation. MCX has around 1.4 million unique client codes (UCC), whereas the equities exchange, NSE, has around 40 million active clients per month.

Therefore, there is still significant room for penetration in the retail segment. The lower ticket sizes shall also enrich the activity in the segment, along with increasing liquidity.

Now that the software transition from 63moons to TCS has been complete, the MCX management is realigning its focus to scaling up the business. The software transaction will also help cost savings, leading to a marked improvement in profitability.

Over the past six months, MCX shares have gained more than 77 percent in trade. In comparison, the frontline index, Nifty 50, has risen about 16 percent during the same time period.

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