Multi Commodity Exchange of India Limited (MCX) Earnings Call Transcript & Summary

Good afternoon, I'll just...

Good afternoon, Mr. Doro.

Good afternoon.

Good afternoon, sir. We have on the call, we have Mr. P.S. Reddy, he's our Managing Director and Chief Executive Officer. We also have with us Mr. Satyajeet Bolar, Chief Financial Officer; and I think you have been informed, but I just wanted to -- this call is being recorded, and it will be available shortly on our website. And begin, sir, over to you.

Sure. Great. Go ahead. How are you?

I'm very good. We are doing very well. Thank you so much. And just I'll reintroduce ourselves. Actually, the call with you in February itself. But we are a U.K.-based FII book currently owned by Ventis Capital. We were set up way back in 2005 by a firm called Caledonia Investments. And we run 2 products. One is a mid and small cap fund, which I manage, it's an LSE-listed trust. And we also have a monthly cap product. Our assets are largely raised from European investors. So we have our -- one of our offices in London, which does all the regulatory business development and compliance side of the business. The investment team, most of us out of Bombay with one analyst sitting in London. And as I mentioned, we were -- our ownership changed with Abertis Capital taking a 100% stake in 2017. But as investors, we are really long-term investors, we like buying into businesses and holding them for a long period of time. So a typical investment horizon is 3 to 5 years. But having said that, I would say over 50% of our portfolio we own for well over 5 years. There are some stocks in our portfolio, which we've held for almost 10 to 12 years now. So really, we like businesses which compound over time. Hence, MCX is a core part of our portfolio. We held it for a long time. And so we periodically get an update on the business on how things are shaping up. But more from a strategic longer-term perspective, really. And so in that sense, we're fairly up-to-date with your business.

So we just thought if you could just share with us. I mean the business has gone through a lot of regulatory places more due to the regulatory side of repeated changes in regulations. But having said that, I think we find like a slight -- I see a quarter of stability. So really wanted your thoughts on how you see things shaping up. And given that the way commodity prices have combated mindshare of everyone, are you worried about more regulatory interventions coming in? But just your thoughts also you now entering a period of where you can actually see nondisruptive momentum building in?

Yes. Thank you for this interaction. But last time also, you were very -- when I interacted with you, you're very -- what you should say very positive about the company. I'm thankful to you. We are all -- we all take the same approach and notwithstanding onslaught of a lot of regulations, which has derailed some of our businesses. But then -- but the markets also got used to it now. One important one is the peak margin circulars. Now they are too straight. And there is some little reprieve also some of the market participants have received in this regard. So that's one part of it. Having said that, yes, margins continue to be on the higher side. Well, if it is figured by volatility, that is perfectly fine because we know that risk management is as much important -- are more important when you volatile than the business itself. So I think we have no complaint about it. But then some of the minimum margins have to be kept reasonably low. And so some of the dispensations that we have asked SEBI are yet to come. Hopefully, we will be able to get those releases also as we go forward. Some of them are like we asked for a mini contracts to be introduced where the trading unit and delivery unit is the same. So that discussion is on. Similarly, we have also requested SEBI to allow us to contribute to SGF subject to withdrawing the same when the volatility is reduced or when the requirements are not there. This is what is called amount fee and the minimum required contribution kind of thing. That is based on the SEBI results. And also we are addressing SEBI. Currently, we have INR 525 crores of [ CF ] and let's keep it as fixed kind of thing, and we will not touch that. And what more than that we will contribute and reduce on the other hand, the margins, especially the crude oil or product matter in gold or any other place. And then we will continue to pump in more capital. But if the requirements are not there, if volatility comes down, we will also with the [ broadband ]. So that dispensation is still pending. And we are also requesting some approvals for the new contracts, which they will come through, I suppose. Instead of relying on maybe crude oil or gold 2, 3 flagship which they will continue to be. We are keen on introducing more and more new products so that the market will be more stable market rather than a volatile market. So that is something, which we are looking forward to. In this regard, we just got April SEBI regarding the options on one monthly options on bimonthly gold features contractor. So that will reduce the tenor of it so that more participation will come. So that is something, which we are looking at. And currently, in -- if there is a spread position between the option and the feature, the members are not getting the benefit of margins. I think that is one major thing that members are looking forward to. And if that also comes through, maybe the auctions volumes can further improve. So these are all the regulatory landscape where I'm only positively looking forward to reform stream to help us do better. And of course, the FI participation, which I spoke already, I think 2, 3 times in the past, I said so they have taken out a consultation paper and then the window is closed. All the responses have been able to resume. Now it will -- I suppose it will go before the CV Board and the poll may come. Another dispensation, of course, which we are looking forward, but that is taking time is the GST related. And I think that will take maybe some more time, although I'm optimistic and then trying to see that it will come in the next month or next quarter kind of thing or next half year. That's not happening as yet. So that is something, which is very, very critical for increasing the participation because not all people will be hedges and all hedges will not also have registration across all states where they are participating where we have warehouses. So it's important that these rules related to the GST filing, et cetera, you reduce. They don't mind paying in GST. I mean that is -- so whatever we are proposing is please grant us permission to have IGSC rather than GST and CGST. That dispensation I don't know how many it will count, but that is one thing, which we have been asking for.

But from the semi angle, now we have one -- we have a new chief. What is your thought process? I mean, it's just to tie up in other areas right now? One, -- and two, what we are hearing on the equity side, there should be more and more planned down equities itself? And I remember last time you -- what you said was the problem is they're eating equities and commodities as far. So -- I mean, the sense we are getting is with some of the trouble some mutual funds have had, there's going to be more slamdown than anything else. So any sense you're getting that are they being more receptive or right now, they're just advocating that behavior?

Well, I don't think there's really lack of attention to the commodities market. I don't think so. But yes, they need to address whatever that needs to be addressed first. So the priority is equally important. And this is some one of our asks then the commodity markets are in the nascent sales and it requires a separate dispensation. We need to elevate to grow further for which the regulatory stuff needed not just within SEBI, but even beyond SEBI needs to be nurtured. And for example, today, banks are not allowed to take any exposure in commodity markets. But although they give loan commodities, okay? We are not allowed to hedge their own exposure to commodities. So I think these things are required to be addressed at the policy level. And I think similarly, GST, I mean, I'm coming back to the GST because it's really, really a big pain point across -- in this industry because in the case of equities, they called it a security, then everything has gone out of the GST rule book. But then this is not the case. So that is the reason. Let us see how it works out.

And what about the participation side, last time you mentioned, there's just about 4 active mutual funds. And on the FPI side, you said they were getting FI size, there were 6, 7 players who are looking at and their volumes are increasing. And you just mentioned looking at something. So just wondering your thoughts how is this part? I mean clearly, volume has now started picking up. But is it the same player that the new players who are coming in? What is the sense you are getting on that sense, on that side?

See, again, here, the problem is the mutual funds, for example, they don't have a much focus on it because mutual funds are embedded to equities from the beginning. And the diversification into equities or commodities is a challenge for them. They need to have their own what -- they need to have some trained fund managers, et cetera. And is the SEBI regulations also to the extent, some more tighter. So we have written to SEBI requesting them, these are the things that they need to liberalize. And things are happening. Again, it's at a slow pace, not to my expectation. And even within the industry also, the task is not there because in equities have given a roaring return in the last year. So they are all happy about it. And yes, it is like that. And in fact, I suggested to [ MP ] that they should have a committee consultation company with our own commodities within MP, so that some focus will come, they will start looking at and asking questions and industry representation to say we will also go. And currently, only 3, 4 funds are there and then they tell us, this is what our pain point is, can you help us? So we also look at it and right to say we request them. This is what it is. That is what is happening. And yes, the silver ETFs have started and again, the server are doing gold ETF, they only launched some of them, silver ETFs, and they are also participating in it. It's not to my satisfaction. Of course, they don't -- as I said, they don't add what we call ADT, daily turn node doesn't go up. But then they will only add what should I say, open interest to the market. And that is happening in that sense, yes. And coming back to the institutional broker participation, I think ICS has picked up very well. And next, we are expecting maybe in the second half of the year, we expect HDFC to, again, launch a services in this segment, commodities also. So I think we will see a good ramp up there also.

One question on the focus front. The one of the brokers actually has a I think as per the last reported number had some -- maybe close to 40% market share in the retail side on the commodity. Does that create any risk for you? Or that is not really a concern?

I don't think so. That's not a concern. It's not just one broker has -- we may have a more retail investor. That doesn't mean retail investor second for 40%.

Sure.

In the total business, they may not account for so much.

What about the foreign side participation?

Participation to permit them, that's what the consultation paper is closed now. And if we have to take the proposal to the SEBI Board. And then regulations have to be amended.

Okay. So coming to the margins to the volume side, your options continue to really pick up pace. And what I see the numbers of April and May are also looking very impressive. I remember last time, you said India may go -- the options and commodities may go the way the equities have gone. I mean just your thoughts on this. Are you really pleased with what's happening? Are you slightly worried is happening? I mean the sort of what is keeping you awake on the side on the way the market is [ ending ]?

I'm not worried but I'm pleased, of course. But then sustainability is very important for us and it's doing well, no doubt at this point in time. We have also launched earlier, we had only crude, which accounted for almost 90%. LG options have started. You must have seen in the month of May to 3,000 -- approximately at INR 3,000 crores is what is happening. And so diversify is taking place. Now that gold options also, we will launch a smaller tenure contract. Probably we will also be able to see some more traction out there. So we need to have both the products, options and features. I'm sure the option writers need to take a cover in future, so futures market will also grow. They will be complementaries, but not that they'll cannibalize each other. There some thoughts for there, people think that it cannibalizes. My answer is no. And it's it either way. They will complement each other.

But I think the equities is very option dominated. You see that trend also happening that I remember there were days when options are increasing higher than future. Is that something you see is becoming a regular feature of sort of feedback you're getting?

Yes. No, that's what I just said, there is gross margin benefits, some short option minimum margin is something small. That is not available between options and features. So that is one of the last couple of market participants. If that comes through, probably it will further increase, okay, the options volume as well as the futures. And that is something which we are looking forward to. Yes. But equity markets took so much time to reach what they are today. And I don't think comparing with that, we will be able to achieve in the next 6 months or 1 year of is desirable and may be expected. But I don't think this is issued will or not.

And just on your years on the -- you're getting on the option that at least surprised us quite positively. I think one was looking at -- I don't know when we spoke in February, it was closer to 1.9%, and the results showed almost 2.7%. So if I can just get some idea, what has changed really with those?

We generally thought that the turnover, I mean, it's one is to kind of contribution is what we thought, that is if one -- which is just 1 and then 3/10 of options are only needed. But actually, this 40% is what it is contributing not 1/3, okay? So that way it has happened. So we -- the realization is very good because the options, which trade close to the money may not get us more revenue because premium may be -- it's the other way. Options, which close to the money premium will be high. And the ones which are trading far away may be low, but most of the options are trading close to the money that sort of premium is high so our margin is also high.

But this can vary over time. I mean it's something...

It would be may vary over time. Yes.

Okay. But the levels you're getting at, whatever, 2.7% is something 1 is, I would say, closer to the trend you see?

Well, that's a -- That's it. That's what has happened, but then I would not like to give that kind of bullish numbers. It happened, it's happened, okay, we enjoy. But I would like to be conservative. That's the way it is. So I maintain one issue fee ratio. That's the way it is.

And the pricing on the future stays the same, is it?

Yes. That remains -- the future stays the same and options also stay the same. They are not changing that. Pricing remains the same.

Okay. And this bold action which you were talking about this 1 month, when is that likely to be launched?

Recently, we said April. So I think it may take 2 months' time for us to put in place to that.

Is there something on the pricing side of it?

No, I'm -- we can even maybe move to, if you want, to on the PCS.

Yes. Just on the PCS side, I believe. How is it panning out? I believe now you our testing has happened, and your contracts like contracts filed in October. So I just wanted your thoughts on how it's shaping up. And could there be some switch over hiccups, which can happen or that's a very unlikely scenario?

See, I think I need to talk in terms of probabilities. So no, the probability of being successful is high, and there could be some probability of not being successful, but so plan B is to run the existing system without 63-months support. That's one kind of plan we have because we have a license. There's no problem. Just the support we -- and -- but we are working all towards making it with whatever the minimum viable product that we can make it run and we will have it run. So we have released more to the trading in part of it. The clearing and settlement function is getting maybe in the next 1 week time, we will release it. And then yes, that's right. We are testing it all. There are a few bugs, no doubt about it. There are bugs that will be there. This is clearly meant for fixing all of them. So we are still, I mean, 3 more months to go 3, 4 months to go end of September. And we plan to launch it at the end of August or early September. That's the way it is.

And just on the numbers, what -- you mentioned in the call that your fixed fee would be somewhere closer to an -- and then there will be this depreciation component. So if I can just get a sense of, on an annualized basis, what would be the depreciation number.

See, what -- currently, we have -- you have found probably we have spent about INR 80 crores or something like that. So that is all hardware, if I'm not mistaken, more or less, to pay maybe what some amount has been paid, but very little. So probably by the end of second quarter, you will get a very clear picture because most payments would have been made by then. And the AMC first 1 year, of course, is free, no AMC. After 1 year, you will have the AMC kick in. What I said was AMC was single-digit figure. That's what we said.

In terms of?

As in term of number of the percentages to the total cost software costs. That is the way.

I see. All right. This is the next big -- so your October to December results would really ramp that figure in place.

Yes, yes. That's right. No doubt about it.

Okay. So the current margins, you are now getting with this [ ACV ] going up. I mean this, you feel, is now sustainable with the addition of the software component coming in. Is that something which obviously sustainable or the yield is still very high as your turnover increases?

Okay. The way that I look at it is presume that the current software costs are INR 55 crores or something which we are paying to 63 more, okay? That same thing gets translated even when it comes to CS, including the depreciation elements, et cetera, et cetera, are AMCs. So if you take it as to fix -- that is the fixed cost. And there's no variable revenue to be -- income to be a variable charge to be paid to TCS. So whatever growth that comes, that will be added to that.

Okay. So currently, you're saying the whole component should be the same, and then you just have -- incrementally, it all goes straight to the bottom line.

Yes, yes, yes.

Okay. Can we pick up something from your side?

Just actually, nothing on this, but actually, sir, TCS is also helping us on the gold spot exchange as well, right?

That's what -- see, what we did was when at the time of RFP in the beginning, we have asked for currency support as well as, of course, mean one is the CD commodity derivatives platform. So they have given all the reports and other. So since we are going with spot, so we have asked them why to develop this one also. But we are very clear. We don't want the derivatives platform to be in any way impacted. So they agreed for that subject to the commodity derivatives platform, whatever the delivery that they have done once it is stable, they will pick up that code and then develop the first spot, what are minimum changes that are required and then deployed. So spot is also we will go with them.

Sure. Sir, pardon me for the lack of knowledge on this. But from a user perspective, would this make a difference that whenever if one wants to do a trade on the gold spot exchange or on the MCX from a user perspective, does it make any difference? Do they see 2 separate...

As per the SEBI requirement, any exchange for that matter, whether it is BSC or NSE, it has to be a separate segment. So you should have a separate vertical and it will have a separate systems. They are not clubbed with the other one. So yes, I can't even create partition in the same trading system and then we create spot exchange out there. So spot platform, yes. Separate, yes. We have to log in separate.

Log in separately, right. And then...

Can't be the same. That's not -- can be the same. The brokers did not take additional lease lines. they can send or [ erode ] the data packets were the same lease line.

And does this then benefit or does this reduce the benefit for us already having a particular customer base for them to incentivize or to maybe match them to maybe even operate on the gold spot? Does it change anything there?

I don't see because nobody uses the front-end platform that is driven by the exchanges, what is called TWS, trader workstation. They work on -- they take the API fee and then integrate it. So probably, if the CTCL that is computer to computer linked kind of concept is there, so they're linking, then probably the speed also they can integrate with the same terminals of the brokers. And then the toggle between the terminals, the pages, that is the way it is. The same one computer, one screen, they toggle between the 2 applications.

Understood. And because BSE had already launched it, so would the brokers be already ready with it or would the...

The BSE launched spot they said they will launch in last year, what you call access with the -- so one was done. Second was this year, accessibility would be better. But the third year accessible [ PM ]. So I think as analysts, you should ask them why they have not launched.

No, no, sir. What I actually wanted -- meant to ask Mora because you did clarify on the call, I think without [ GSP ] clarification, that it can't happen. So what I said was that either infra is ready, but they are not able to launch it. So would the brokers be already ready so that whenever this happens, the broking community is ready to go ahead with it? Or would that also be some phase?

Focus may be really -- I don't know whether they are ready or not. But the point I'm making is that the other issues are to be addressed. That is point number one. So there is a natural or concentric little force here, okay? The reason being is that we have the gold that will take place. Feeling and settlement, if it is done. Let us say spot clearing also done by our own clearing corporation. There will be a synergy between the 2, okay? Somebody who is taking delivery here, they can queue deliveries there or there could be some margin-related concessions can be given. But they don't have any features in gold, okay? Transactions. So what is that added advantage that the participants will get?

Okay. Understood.

So overall, how are you seeing yourself in the sort of way it position you have? Because you've had 2 very challenging years. And do you feel now you're entering a significantly better pace and all the damage that could have happened in terms of regulatory side and -- is behind and it's largely more of issue of more positive news flow than negative news flow? So I mean, just your own perspective, do you think you're in a good wicket right now with a lot of changes having already happened?

Well, I don't know that we [indiscernible], but in terms of the landscape, yes, it is looking positive for me. The landscape is looking positive, no doubt about it.

And incrementally, what can you do to [ organize ] SEBI? I remember last time you were really saying it's up to the investors now, people like us to really be pushing SEBI. But I mean what do you feel can change this to get more the sort of spotlight as you're saying? I mean, from your end, what can really change, which you feel you need to do possibly better to get the other mutual funds participating or SEBI being more proactive?

See, of course, it is money, which makes anybody to run, okay? So we should find in the marketplace some money in it. And as I said, equities were rewarding very well. So the attention is taken off from this market. And on our part, we are trying to educate mutual funds, telling them what are the arbitrage opportunities that they get. We have taken a 3-year data and then see -- show them, look, you get -- I mean there are many arbitrage funds, by the way. So they can participate and earn 12%, 15% return in some of the contracts. Now that opportunity may not be there all the time. Because they are not used to look at this market, they are completely ignoring it. So we are trying to show them where they can really step in and then make money. And yes, that's the way it is. But again, as I told you, regulators did not -- when they are carving out the regulations for mutual funds, they didn't consider much of the commodity market requirements in mind when they called out. And when the silver ETFs notes have been issued, they said silver bar should be the PKs standard. Now there's nothing called a titular silver standard bar when PKs and plus or minus, some tolerance limit will be there. And one case, we are 200 pages in something like that. But they can't provide for the tolerance. So in the marketplace, when they get something, anything other than the PKGs, they will say, no, this is not as for the SEBI requirement. So I think that's a challenge. These are the issues that we are taking up. And -- but coming back to your -- I think constantly you ought to be at it. That's the way I look at it. And I'm pretty persistent in that sense. I don't leave anybody. I don't take no for an answer to the extent. So if we take more time, I have no problem, but I will keep hammering. That's the way it is.

Because on the mutual fund side, it's a very, very competitive industry. And I'm surprised that they not grab the opportunity. I understand when it was allowed them, there's so many issues on not linking the clearance side and stuff like that. But I would have thought that given the mutual funds just launching in equity is the same product everyone in multiple size of it. So this is an opportunity. And I'm surprised that you're not seeing the sort of competitiveness here in terms of new product launches.

Yes. That's right. That's right. I've been meeting the CEOs of mutual funds also and who so matters they all promise that we will take it up. But yes, I mean I think we should continue to do it. And if there is one such story, the rest will follow. That is the way I look at it.

Actually, that's why the one launch happens which is slightly high profile.

Yes, very well at this point in time, Lipana Tata Mutual Fund and CS -- and I think Portes is the biggest fund that they are running. I think we have them also or lease.

Good. Is there anything else from your side?

I'm all good.

Thank you so much. Always a pleasure speaking with you. And we wish really wish you all the best. And as I mentioned, we are playing the story over the long term. And hopefully getting into a really good phase now and things only on positive. And all the best, and thank you once again for all your time.

Thanks. Thanks to both of you. Stay safe and [indiscernible].

Thank you so much.

Thank you.

Thank you. Thank you both.