This is an archive article published on March 17, 2025

Premium

MCX cracks 26% in 34 days: Bearish sentiment or weak fundamentals?

MCX stock has dipped 26% in a little over a month as markets turn bearish. What has pulled down MCX shares? Was it an investor overreaction or weak fundamentals?

The past two years' market rally had already stretched the valuation of stocks, making investors more sensitive to earnings growth slowdowns. (Representative)

Written by: Puja Tayal

8 min readMar 17, 2025 01:41 PM IST First published on: Mar 17, 2025 at 06:30 AM IST

The stock market has been in a correction phase since December 2024, with most indices experiencing double-digit declines. Even companies that facilitate capital markets — traditionally favoured by investors — have not been spared. Brokers, depositories, and stock exchanges have all felt the pressure, with stock prices of Angel One, Motilal Oswal Financial Services, Central Depository Services Limited (CDSL), CAMS, and BSE falling more than 30% from their peaks.

Hence, the Multi Commodity Exchange of India (MCX) witnessing a 26% dip in 34 days after a staggering 400% rally over 19 months is not unexpected.

Factors influencing market momentum

By mid-2024, analysts had warned of a potential correction as many stocks were trading at stretched valuations. Despite global headwinds, the Indian stock market continued to climb, driven by strong domestic economic activity and robust corporate earnings. Investor confidence surged, leading to increased retail participation, further supported by technological advancements and SEBI’s investor-friendly regulations.

However, concerns over US trade policies have created fresh uncertainty. Donald Trump’s retaliatory tariffs have unsettled Indian importers and exporters, raising fears of a global trade war. Foreign institutional investors (FIIs) have also been pulling out funds, adding to market volatility.

The past two years’ market rally had already stretched the valuation of stocks, making investors more sensitive to earnings growth slowdowns. As several companies reported lower-than-expected earnings, their stock prices took a hit. These combined factors triggered a much-needed correction.

Why did MCX stock fall?

After rallying more than 400% to reach an all-time high of Rs 7,048 in early December, MCX stock has seen a correction of 32% to Rs 4,794 as of March 13, 2025.

MCX Stock Price Momentum from May 2023 to March 2025

Source: Trading View

One major factor behind the decline was a bearish outlook from Morgan Stanley. On January 21, 2025, the brokerage maintained an “Underweight” rating on MCX, setting a price target of Rs 3,715 — 21% lower than the then-current price of Rs 4,794. Morgan Stanley cited a slowdown in Average Daily Revenue (ADR) and a Q3 FY25 earnings miss amid stretched valuations. The stock subsequently dropped 26% in 34 days (5 February-10 March).

However, this is not the first time that Morgan Stanley has given bearish commentary. It has maintained an “Underweight” stance on MCX since April 2024. Despite this, MCX stock had surged 66% by December, driven by strong earnings growth.

Did investors overreact to Q3 earnings?

MCX is a trading platform for commodities futures and options (F&O), earning 70-80% of its revenue from energy commodities (oil, natural gas, electricity) and 20-22% from bullion. The platform generates revenue primarily from transaction fees, which are a percentage of turnover.

Historically, commodity derivatives were a niche market, but this changed after SEBI brought them under its regulatory purview in 2015. In 2016, the regulator allowed options contracts in commodities. Today, options contracts account for 88% of MCX’s average daily turnover.

MCX’s Average Daily Turnover for Options

Source: MCX Q3 FY25 Earnings Presentation

In April 2023, SEBI allowed foreign portfolio investors (FPIs) to participate in Exchange-traded Commodity Derivatives, driving turnover for MCX. To ensure smooth operations, MCX has been expanding its warehouse infrastructure for physical delivery settlements and maintaining a settlement fund for cash transactions. Over the past two years, these initiatives have pushed its Average Daily Turnover (ADT) to record highs.

New trading platform

In October 2023, MCX launched a new Commodity Derivative Platform developed by TCS. The increased software cost pulled down MCX’s net profit by 44% in FY24. As a result, comparing net profits year-over-year may not accurately reflect the company’s financial health.

The increase in technology expenses exceeded Morgan Stanley’s projections, making it “Underweight” on MCX with a target price of Rs 2,085 in April 2024. However, other analysts took a more optimistic view. Motilal Oswal upgraded MCX to a “Buy” rating, with a target price of Rs 4,300, anticipating that new product launches such as steel bar, gold serial contracts, and power contracts would drive trading volumes.

Nine months have passed, and MCX ADT has reached new highs. ADT increased from Rs 1.16 lakh crore in Q3 FY24 to Rs 2.35 lakh crore in Q3 FY25.

MCX’s Quarterly Average Daily Turnover

Particulars

Q3 FY23

Q4 FY23

Q1 FY24

Q2 FY24

Q3 FY24

Q4 FY24

Q1 FY25

Q2 FY25

Q3 FY25

Average Daily Turnover (Rs Crore)

62,689

66,342

83,341

1,04,636

1,16,785

1,31,230

1,72,757

2,20,249

2,35,500

Sequential Growth

5.8%

25.6%

11.6%

12.4%

31.6%

27.5%

6.9%

Source: MCX Earnings Presentation

MCX recorded its all-time high daily turnover of Rs 5 lakh crore on 13 January 2025, with the day’s crude oil options reporting their highest turnover of Rs 4.1 lakh crore. This data shows high volatility in oil F&Os a week before Trump’s oath-taking ceremony.

Fixed transaction fee structure

Apart from volatility, increased retail participation from new product launches and stronger regulations for investor protection and transparency also drove the ADT. One such transparency initiative was a move from a tiered fee system to a fixed transaction fee structure, effective October 01, 2024.

Futures contracts: ₹2.10 per lakh of turnover
Options contracts: ₹41.80 per lakh of premium turnoverSettlement Guarantee Fund

MCX Clearing Corporation, which manages risk and guarantees commodity deliveries, increased its SGF by 18% to Rs 896.25 crore in Q3 FY25 to meet regulatory requirements.

Guaranteed settlement and new product launches drove both participation and ADT.

MCX’s Profit Margins

Particulars	Q1 FY24	Q2 FY24	Q3 FY24	Q4 FY24	Q1 FY25	Q2 FY25	Q3 FY25
EBITDA Margin	18.7%	-5.3%	-0.9%	60.3%	59.8%	65.9%	66.6%
Net Margin	11.8%	-10.4%	-2.6%	44.1%	43.8%	49.4%	49.3%

Source: MCX Earnings Presentation

Adding to the high ADT was stability in technology expenses. October 2023’s technology investment in a new platform helped MCX move to a fixed annual maintenance charge. This improved its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to 66.6% in Q3FY25 from 18.7% in Q1FY24 (before the technology investment) and net margin to 49.3% from 11.8% during the same period.

Are MCX’s valuations stretched?

The growing turnover and profit margins drove the stock price of MCX and kept the valuations in check.

MCX PE Ratio for 10 Years (March 2015-March 2025)

Source: Screener.in

MCX’s 10-year median price-to-earnings (PE) ratio is 43.4x, and the stock is currently trading at 46.6x, slightly above the median. MCX’s PE ratio surged significantly in 2023 as ADT rose, but software costs reduced the earnings per share (EPS). However, the PE ratio fell as profit margins improved.

There is more scope for profits to grow with an increase in ADT.

Morgan Stanley is sceptical about MCX’s revenue sustainability because of a significant concentration risk (high exposure to energy and bullion). Hence, it finds MCX’s current valuations stretched. However, UBS and Motilal Oswal remain bullish on MCX and see every dip as a buying opportunity. Here’s why.

They expect increased participation and new product launches to drive MCX’s volumes between the fiscal years 2025 and 2027. In October 2024, UBS had a price target of Rs 8,000 after it raised MCX’s earnings estimates for FY25 and FY26 by 60% and 75%, respectively. In September 2024, Motilal Oswal reiterated a target price of Rs 6,500, which represents 42 times its September 2026 EPS estimate.

In conclusion

MCX shares could continue to rally as long as it gets high volumes in energy and bullion F&Os. Key factors influencing these volumes include geopolitical developments and their impact on commodity prices. MCX stock price could remain volatile amid economic uncertainties and a slowdown in trade due to tariffs in the short term. This could present an opportunity for the long term when these trade tensions ease and there is clarity on tariffs.

Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities, or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, and resources and only after consulting such independent advisors as may be necessary.