BSE, MCX or IEX: The Future Multibagger? 

The Sensex has barely gained 7.5% over the past six months.

But the exchange, to which the benchmark index belongs, has caught the fancy of investors.

The stock of India's oldest exchange, Bombay Stock Exchange (BSE), has more than tripled in the same period.

BSE, the first-ever stock exchange in Asia, was established in 1875. But today it is not the only exchange in the country. Nor is it the only listed exchange.

Exchanges are typically platforms for trading a particular commodity or product, whether tangible or intangible. Exchanges that are the oldest or have first mover advantage, tend to find favour amongst investors. This is for primarily two reasons:

1. Monopolistic nature of market share, as the competitors typically tend to have far smaller share of the business. In addition, regulatory bottlenecks create entry barriers.
2. The largest chunk of the exchange revenue tends to come from transaction fees from the registered participants trading on the exchange. Such revenue is sticky, scalable and has high network effect.

Moreover, exchanges are necessary for price discovery to sustain a vibrant economic structure.

Now, India's three leading exchanges, BSE, MCX and IEX operate in different genres.

One is a stock exchange (operating in financial sector).

The second is a commodity exchange (operating in manufacturing sector).

The third is an energy exchange (operating in infrastructure sector).

All three exchanges are now listed. Also, they are perceived by investors as the gateway to the long-term prosperity of the underlying sector they operate in.

However, the moat, financial strength and valuation of each exchange stock is strikingly different.

Let's first consider BSE. It is not just the oldest in India but also one of the fastest stock exchanges in the world today, with a speed of 6 microseconds.

The total number of companies listed on the exchange are about 5,400 in the year 2023, of which around 4,000 are regularly traded.

The exchange helped mobilise funds to the tune of Rs 18.5 trillion through the listing of equity, bonds, REITs, InvITs, and commercial papers in the last financial year.

Since listing in 2017, the stock has delivered gains of nearly 600% (CAGR of 30%) and 85% of the gains came in 2023 alone.

Next comes MCX.

The Multi Commodity Exchange of India (MCX) was India's first listed exchange. It is a commodity derivatives exchange that facilitates online trading of commodity derivative transactions.

Although incorporated way back in November 2003, the exchange enjoys over 95% share in the commodity derivatives market even two decades later.

MCX has completely monopoly in derivative trading of precious metals, metals etc. But it is agri-commodities where the entity has yet to catch up with peers.

The company has a pan-India extensive reach with over 5.1 m unique clients and a presence in 740 cities.

MCX has strategic alliances with leading international exchanges such as London Commodity Exchange, Taiwan Futures Exchange etc for the purpose of seamlessly integrating with the global commodities ecosystem.

It also offers warehousing activities through its wholly-owned subsidiary Multi Commodity Exchange Clearing Corporation (MCXCCL).

Since listing in 2012, the stock of MCX has delivered gains of more than 70% (CAGR of 5.5%).

Finally comes Indian Energy Exchange (IEX).

To put things in perspective, it is the job of the electricity distribution companies (discoms) to ensure round-the-clock electricity supply. Hence, discoms need to buy the right amount of electricity from power producers. They usually have long-term power purchase agreements (PPAs) with power generators lasting nearly 25 years.Once the PPA is signed, there is very little scope for change either in the electricity price or quantity. And both generators and distributors must honour their obligations.Since demand of electricity doesn't remain constant throughout the year, short term power is traded on the power exchanges.

Over the years, Indian villages and transport systems are to get more electrified. Plus, the demand for power will escalate with penetration of automated manufacturing, electric vehicles and digital tools.

Thus, compared to stock exchange and commodity exchange, the visibility in volume growth for power exchanges is much higher.

IEX had the first mover advantage.

Many investors still fondly remember the stock of IEX for the whopping 800%+ returns between March 2020 and October 2021.

This was when investors realised that this entity was unlike most infrastructure companies saddled with high debt and high capex.

IEX was back then the only platform for buying and selling electricity in India. It had market share of more than 95%. Even its financials looked unbelievably impressive.

However, as new incumbents in the power exchange business (Hindustan Power Exchange (HPX) and Power Exchange India (PXIL) entered, things looked less rosy. IEX was no longer a virtual monopoly stock, although its market share still edges around 90%. But regulations around electricity pricing took a toll on margins and valuations.

The stock has almost halved since November 2021.

Over last two years, concerns over market coupling, which could mean lower margins for IEX, have taken centre stage.

The investor reaction to this regulatory issue led to temporary sluggishness in the stock. However, it is important to decipher if the stock of India's largest energy exchange has legs.

Since listing in 2017, the stock of IEX has delivered gains of over 140% (CAGR of 15%).

Now, coming to the financials of the three entities.

The long term and near-term profit growth as well as return ratios reflect the nature of the underlying business.

However, it is IEX that stands out due to its ability to pass on any rise in prices to its customers.

The Consistent and Most Profitable Exchange?

But superior financials are not the only reason why IEX seems to be the best bet to create long term wealth. There is more to it.

What Makes IEX the Future Multibagger?

Clear visibility in growth

Even assuming loss of market share to competitors HPX and PXIL over the next few years, IEX will continue to be the most dominant player in power exchange business. Its strong network effect will allow IEX to leverage its strength, as trading in multiple sources of clean energy, generated throughout the country, becomes a reality.

Majority stakes in multiple exchanges

IEX launched the International Carbon Exchange, and Indian Gas Exchange (IGX) as its subsidiaries in recent years. These are platforms for the growing supply of carbon credits and exchange-based trades to meet demand for gas-based fuel, respectively.

To put things in perspective, India may sell 200 million carbon credits by 2030. As per estimates, the demand from Indian companies would be to the tune of 120 million carbon credits by that year. Rest could be offered to international customers.

While energy certificates and carbon credits are new to India, these sufficiently allow a company like IEX to diversify its revenue stream and get though regulatory hurdles over time.

Valuation Upside

The biggest upside to the stock of IEX, compared to peers, is in its valuations.

Both BSE and MCX currently command nearly 90 times earnings (P/E multiple). IEX, on the other hand, has a far modest multiple of 36 times earnings.

Therefore, while BSE and MCX remain vulnerable to market swings. But the stock of IEX can sport one of the fastest recoveries.

So, no doubt, BSE, MCS and IEX are the three critical exchanges that hold important roles in India's economic and financial trajectory. But the stock of IEX is bound to be one of the biggest trail blazers on the runway.

Please note that this is not a recommendation on any of the stocks mentioned in the video. Please conduct all necessary due diligence and consult your investment advisor before acting on any stock.

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