One common stock across 6 top performing mutual funds: Is MCX a signal or a crowded trade?

Six top-performing mid- and small-cap mutual funds, with one-year returns ranging from 18% to 32%, have only one stock in common: Multi Commodity Exchange of India. MCX is the sole overlap between the 13 stocks shared by three leading mid-cap schemes and the six names common to three top-performing small-cap funds.

Among the mid-cap schemes, HSBC Midcap Fund delivered a one-year return of about 24%, ICICI Pru Midcap Fund returned 19% and WhiteOak’s Mid Cap Fund gained 18%.

ICICI Pru Midcap Fund had the largest MCX exposure at 4.33%, compared with 0.96% for HSBC Midcap Fund and 0.74% for WhiteOak.

The small-cap group generated stronger returns. Trust MF Small Cap Fund returned over 32%, Bank of India Small Cap Fund gained more than 27% and Motilal Oswal Small Cap Fund delivered over 26%.

Trust MF Small Cap Fund held 1.85% in MCX, while Motilal Oswal Small Cap Fund and Bank of India Small Cap Fund had allocations of 1% and 0.87%, respectively.

Across the six schemes, MCX allocations ranged from 0.74% to 4.33%, with a simple average of about 1.62%. That makes it a widely owned stock rather than an equally sized consensus bet. Four of the six funds held approximately 1% or less, while ICICI Pru Midcap Fund accounted for the standout position.

Also Read |MCX shares rise 2% as JPMorgan upgrades, raises target price after this Sebi proposal

UBS sees a re-rating opportunity

UBS Global Research strengthened the bullish case last week by upgrading MCX to Buy from Neutral and raising its 12-month price target to ₹3,800 from ₹3,600. UBS said average daily transaction-fee revenue had stabilised at ₹95 million to ₹100 million, with the August month-to-date run rate at ₹99 million, slightly better than it had expected.

The brokerage also identified a recent Sebi consultation paper as a potential growth catalyst. The proposal would allow foreign portfolio investors to participate in physically settled non-agricultural commodity derivatives and non-agricultural index derivatives.

“We believe this will structurally deepen the commodity market and become an important medium-term growth catalyst for MCX,” UBS said.

Earlier this month, JPMorgan also upgraded its rating on MCX to ‘Overweight’ from ‘Neutral’, and hiked its target price to Rs 3,500 apiece from Rs 2,560 apiece, while noting that Sebi's proposal to admit FPIs into non-agri commodity index derivatives marks the deepest structural widening of foreign investor base in Indian exchange-traded commodity derivatives (ETCDs) since FPIs were first onboarded in 2022.

UBS has raised its earnings-per-share estimates by 4%, 8% and 9% for FY27, FY28 and FY29, respectively. It valued the stock at 44 times estimated September 2028 earnings.

The brokerage said MCX was trading at 40 times one-year forward earnings, about 15% below its three-year average after the stock declined 15% over the preceding three months.

UBS expects commodity volatility to support trading activity. Energy contracts have benefited from crude-oil volatility arising from geopolitical developments, while higher gold prices and volatility could provide a tailwind for bullion volumes.

It forecast average daily transaction-fee revenue of ₹98 million in both FY27 and FY28 and expects operating leverage to lift MCX’s Ebitda margin by four percentage points from FY26 to 77% in FY28.

The mutual fund overlap is also accompanied by interest from Jefferies’ global head of equity strategy. Earlier this month, Chris Wood replaced HDFC Bank and PolicyBazaar with MCX and Lenskart Solutions in a portfolio benchmarked against the MSCI India Index.

“The investments in HDFC Bank and PolicyBazaar will be removed and replaced by investments in Multi Commodity Exchange of India (MCX) and eyewear retailer Lenskart Solutions,” Wood wrote in the GREED & fear report. MCX and Lenskart were assigned weights of 4% each.

The bullish calls follow a weak sequential performance in the first quarter, driven by a sharp decline in volumes from an elevated fourth-quarter base.

UBS, however, focused on the underlying year-on-year growth. MCX’s first-quarter revenue rose 88% to ₹7 billion, supported by 47% growth in futures average daily turnover to ₹10.5 trillion and a 266% increase in options notional average daily value.

The number of traded clients doubled from a year earlier to 1.37 million. UBS said the sequential moderation had not undermined the broader participation trend.

Also Read |UBS upgrades MCX to Buy with Rs 3,800 target price: Can it boost the stock?

Dolat flags regulatory and valuation risks

Dolat Capital presents the counterargument. In a report last month, it initiated coverage on MCX with a Sell rating and a ₹2,400 price target, implying 17% downside from its reference price of ₹2,893.

Its central concern is the impact of revised RBI regulations on proprietary traders that previously used bank guarantees to obtain leveraged exposure.

Dolat estimated that bank guarantee-based exposure accounted for about 15% to 20% of futures and options volumes. Replacing bank guarantees with commercial paper funding could increase the cost from about 1% to 11%, potentially making some proprietary trading strategies unviable.

The brokerage consequently factored in reductions of 6% and 13% from its base-case average daily turnover estimates for FY27 and FY28, respectively. Its revenue and profit forecasts were about 8% and 13% below consensus for the two years.

Dolat forecast a 15% profit CAGR between FY26 and FY29, but said the stock’s valuation, then at approximately 42 times FY28 estimated earnings, was expensive relative to the expected growth.

“We believe current valuations do not factor in emerging regulatory headwinds,” Dolat said.

The brokerage acknowledged potential upside from a coal exchange, colocation, increased foreign investor participation and stronger commodity-market momentum. It said, however, that these opportunities could take time to translate into revenue.

What should investors track?

The portfolio data alone do not establish MCX as a crowded trade. The stock is present across all six funds, but most allocations remain modest. The more significant concentration lies in the expectations underpinning the investment case.

The bullish thesis requires transaction fee revenue to remain near ₹95 million to ₹100 million a day, commodity volatility to sustain trading volumes and proposed foreign-investor access to translate into meaningful participation.

The bearish case rests on proprietary trading volumes weakening as funding becomes more expensive, while the stock continues to command a high earnings multiple.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)