Regulatory tailwinds to boost growth for MCX, says HDFC Securities, retains Buy for 18% gains

The brokerage expects FPI participation in deliverable contracts and new bullion and metals index options to drive the next leg of growth, with a potential 20-25% increase in options premium. It also sees structural headroom for volume growth as commodity derivatives remain a small share of equity-market trading.

HDFC Securities has set a target price of Rs 3,600 apiece, implying a potential upside of 18.42% from MCX’s August 18 close of Rs 3,040 apiece on the NSE.

Regulatory easing could widen MCX’s participant base

The brokerage highlighted that the FPI consultation paper, already endorsed by the Commodity Derivatives Advisory Committee (CDAC), proposes allowing FPIs in non-agricultural index derivatives and physically deliverable contracts such as gold, silver and base metals, subject to a pre-tender exit condition.

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Sebi has also proposed a compulsory square-off or rollover window from T-3, with residual positions transferred to the designated trading member’s proprietary account at the T-1 closing price. FPIs currently account for only around 3% of MCX volumes, versus 16% at equity exchanges.
The second consultation paper focuses on ease of doing business, including removal of close-to-money option series, greater exchange discretion on position limits and outsourcing of position-limit monitoring to clearing corporations.Sebi has also allowed margin exemptions, except mark-to-market margins, for positions backed by early pay-in of certified goods, while extending the benefit to options. The margin and SGF frameworks are also under review.

“These developments amplify our earlier thesis of sustained options growth — supported by both product innovation and structural market reform — and strengthen our conviction on MCX’s long-term earnings trajectory,” wrote Amit Chandra and Arjun Savla of HDFC Securities in a report.

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FPI access, index options seen driving next leg of growth

According to HDFC Securities, the first-order impact of the proposed changes is a boost to volumes. FPIs account for around 5% of volumes in cash-settled contracts such as crude oil and natural gas. Applying a similar activity level to bullion, the premium ADTV could increase by 15-20%.

Additionally, deeper participation could improve domestic price discovery, tighten spreads and strengthen convergence with international benchmarks.

The second-order impact, according to the analysts, is larger and underappreciated: the scaling of index contracts.

BULLDEX and METLDEX exist but do not contribute to premium today because the institutional buyer of a commodity index product, such as an FPI, has been excluded wherever the underlying is physically settled. Removing that restriction could make index options more attractive as the product is cash-settled.

Bullion and metals contracts offer fresh premium opportunity

Base metals offer a parallel opportunity. Metals contribute only around 1% of premium despite a deep physical ecosystem in copper, zinc, aluminium and lead.

FPI access and index access together could support the formation of a genuine metals vertical in options rather than a futures-only franchise.

The analysts estimate that index and metals contracts together could add around 25% to premium and around 20% to PAT over the next two years.

“This optionality is not in consensus numbers. There could be some cannibalization in bullion futures volume but the rise in options/Index volume will be incrementally positive,” said the analysts.

Lower margins could improve capital efficiency and turnover

The third leg, according to the brokerage, is capital efficiency. Initial margins on MCX derivative contracts — crude at around 30%, gold at around 10% and silver at around 25% — are high and directly affect volumes.

“Any rationalization of margins, together with the early pay-in exemption and a lighter SGF, releases capital at both the member and the client level and should translate into higher turnover velocity,” said the analysts.

Valuation remains attractive versus historical levels

Analysts at HDFC Securities pointed out that MCX is down 13% over the last three months but is up 80% over the last one year and 32% year-to-date. The stock trades at 37x FY28E EPS.

Historically, MCX has traded at around a 15% premium to equity exchanges, reflecting its optionality and materially lower regulatory risk. HDFC Securities sees the case for that premium re-establishing itself.

Rising volumes, a stable technology platform, regulatory tailwinds and the option value attached to a visible pipeline of new products have driven the stock’s outperformance to date, the analysts said, adding that they expect this trend to continue.

The stock has traded at a three-year average one-year forward P/E of around 44x and is currently valued at 45x/37x FY27E/FY28E EPS.

“We assign a core P/E multiple of 45x to June-28E core PAT and add net cash excluding the settlement guarantee fund, which yields a target price of Rs 3,600; the implied multiple on Jun-28E EPS is 43x. We keep FY28/29E EPS unchanged and maintain our Buy rating,” wrote the analysts in the research note.