Could Falling Oil Prices Spoil MCX’s Fun?

MUMBAI
:

Shares of Multi Commodity Exchange of India Ltd (MCX) have been in the spotlight as the October deadline of the Securities and Exchange Board of India (Sebi) to charge uniform fees to all brokers approaches. The stock has tripled in value over the past year as investors have taken note of the rising activity in commodity trading and MCX’s dominant position with a 98% share in commodity futures trading as per June quarter (Q1FY25) data.

In its July 1 circular, Sebi had directed market infrastructure institutions (MIIs) to redesign the existing segment structure to one that is uniform and equal for all members (as per the label). During the last earnings call, the MCX board had said that it was still in the process of finalising the rate.

Currently MCX charges fees ₹175 to ₹260 for value ₹1 crore for futures contracts for different brokers depending on their volumes. Similarly, the premium rate of options ₹The contract value is 1 crore (not based on notional value of trade) ₹4000 to ₹5000. ICICI Securities has adopted the average transaction fee rate of fiscal 2024 in its estimates for fiscal 2025 and 2026.

Impact of oil prices

Investors should not lose sight of the impact of falling oil prices on MCX. This is because options are the company’s main earnings driver and oil options account for a significant portion of it. In Q1 FY25, trading fees accounted for 85% of MCX’s total revenue. Here, almost 65% of the trading fees came from options trading. Within options, the share of oil options was around 75%. MCX’s crude oil contracts are based on either Nymex or Western Texas Intermediate (WTI) crude oil.

Nymex crude oil fell to an average price of $69 per barrel in September from $75 in August. There is a strong possibility that the value of the option premium will fall as the value of the futures contract falls. For example, if the price of crude oil is $70 per barrel, then assuming the premium is 1%, the at-the-money (ATM) contract premium is 0.7 or ₹56 at the exchange rate ₹80. If the price of oil falls to $60, then the 1% premium will fall to $0.60 or ₹48. In this way, the value of the premium decreases by about 15%, which causes the same decrease in trading fees, even if the number of contracts traded remains the same.

Of course, it could be argued that gold and silver prices have risen sharply, which should boost the value of gold and silver futures. However, futures contracts accounted for about 35% of total transaction fee revenue, and precious commodities accounted for 70% of total futures contracts. So their share of transaction fee revenue is 25% compared to 50% for oil options. In simple terms, the potential gains from precious metals futures revenue may not be able to offset the likely decline in oil options revenue.

ICICI Securities expects MCX’s options revenue to be ₹680 crore in fiscal year 2025 and ₹950 crore in FY26. ICICI analysts have assumed a conservative lower option premium of 1.4% of the notional value of the FY26 trade. In comparison, it was 1.6% in the first five months of FY25. However, the notional value itself could be negatively impacted by lower crude oil prices. This could reduce the premium value, hurting MCX’s trading revenues. As the first half of FY25 comes to an end, the potential risk from lower crude oil prices could have a significant impact on the FY26 estimates.

That in turn could cap the near-term surge in the stock, which is estimated to be trading at 47 times estimated fiscal 2026 earnings. Bloomberg.