Can the drop in crude oil prices spoil the party for MCX?

Multi Commodity Exchange of India Ltd (MCX)stock has been in focus as the Securities and Exchange Board of India's (Sebi) October deadline for charging uniform fees to all brokers approaches. The stock has tripled in value over the past year as investors took note of the growing activity in commodity trading and MCX’s dominant position with a 98% share in commodity futures turnover based on the June quarter (Q1FY25) data.

In its circular dated 1 July, Sebi mandated market infrastructure institutions (MIIs) to redesign the existing slab-wise structure into one that is uniform and equal for all members (true-to-label). In the last earnings call, MCX’s management said they were still in the process of finalizing the rate.

Currently, MCX charges ₹175 to ₹260 on the value of ₹1 crore for futures contracts to various brokers based on their volumes. Similarly, the rate on options premiums of ₹1 crore contract value (not on the notional value of turnover) is ₹4,000 to ₹5,000. ICICI Securities has assumed FY24’s average rate of transaction charges for their FY25 and FY26 estimates.

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Impact of crude oil prices

Investors should not lose sight of the impact of falling crude oil prices on MCX. That’s because options are the company’s main earnings driver, and crude oil options form a big chunk. In Q1FY25, transaction charges formed 85% of MCX’s total revenues. Here, almost 65% of transaction charges came from options trading. Within options, the share of crude oil options was about 75%. MCX crude oil contracts are based on Nymex or Western Texas Intermediate (WTI) crude.

Nymex crude has fallen to an average of $69 per barrel in September so far from $75 in August. There is a high probability that the premium value of options will come down with the decline in futures value. For instance, if the crude oil price is $70 per barrel, then, assuming the premium is 1%, the at-the-money (ATM) contract premium works out to $0.7 or ₹56 at an exchange rate of ₹80. If the crude price drops to $60, then the premium at 1% drops to $0.6 or ₹48. Thus, the premium value falls by about 15%, causing an equivalent fall in transaction charges even if the number of contracts traded remains the same.

Sure, it is possible to argue that gold and silver prices have been surging and that should increase the value of gold and silver futures contracts. However, futures contributed about 35% of the total transaction charges revenue, and the precious commodities accounted for 70% of total futures. Thus, their share in transaction charges revenue is 25% vis-à-vis the 50% of crude oil options. Simply put, the potential gains in revenue from futures of precious metals may not be able to offset the likely fall in revenue from crude oil options.

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ICICI Securities expects MCX’s revenue from options to be ₹680 crore in FY25 and ₹950 crore in FY26. ICICI’s analysts have assumed a conservative lower premium value of options at 1.4% of notional trading value for FY26. In comparison, it was 1.6% in the first five months of FY25. However, there could be a downside to the notional value itself due to the lower crude prices. This can lower the premium value, thus hurting MCX’s transaction revenues. With the first half of FY25 coming to an end, the potential risk from lower crude oil prices might have a significant impact on FY26 estimates.

This, in turn, may cap sharp near-term upsides in the stock, which is trading at 47 times FY26 estimated earnings, according to Bloomberg.

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