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

Charanjit, good afternoon. Welcome to the call with MCX. I have on the call Mr. Satyajeet Bolar, he's our Chief Financial Officer; and Mr. DG Praveen, he's our Head of Investor Relations. I think you have been informed, but I just want to reiterate, the call is being recorded. And it will be available shortly on our website. We can begin the call now. Can you please introduce yourselves?

Yes, sure. Hi. So myself, I'm Charanjit Singh from DSP Mutual Funds. So DSP -- at DSP, we are managing almost [ INR 1,00,000 ] crores of AUM. INR 50,000 crores is in equity and INR 50,000 crores is also in debt. And we have multiple schemes where we have mid cap, small cap, tax [indiscernible] and opportunities fund. And also we manage some of the international pension money like Norges and Canadian pension funds. So that's what our -- DSP's background is. And so the main purpose was to get an update on MCX. I've had earlier also interactions with the management. And first of all, apologies for the last time because of the broadband issue, I was not able to connect. I kept trying for 15, 20 minutes, but was not able to connect on the call. So apologies for that. So I thought -- let me connect with the management and understand. When we look at MCX, generally, we see that MCX is a company which should benefit from all the volatility, which is there in the commodity side. But when we see on the average daily turnover, there has not been major growth, and it has been stuck at that INR 25,000 crores, INR 26,000 crores level. So the point is to understand [indiscernible] these regulatory changes have definitely impacted our volumes in terms of what has been the decision taken by the regulator in terms of the margin requirement. So how we should see now going forward in terms of the turnover changing going forward in [indiscernible] is the future. And then also, if you can touch on the options, which has been introduced recently, and now we are trying to scale up those volumes. So that's my first question, sir. Yes.

So -- thank you, Charanjit. And -- so coming to the question, what you have asked, related to the turnover, you definitely even we could be able to see some drop that has happened in the futures turnover that is what is clearly visible. But at the same time, we could really get -- the volumes could be able to really scale up higher in case of options contract. So one is really the regulatory, the framework, which has transformed and now we are really seeing a good amount of growth in our options contract. If you compare it with last year, there is a very sharp raise in options turnover, like in FY 2021, we have done a volume of something about INR 943 crores compared to FY '21, '22, where we could be able to scale it up to INR 7,860 crores. But significantly, we also started charging the options contract, so which was not the case earlier. And from the last year -- I mean, during this financial year from September, if I'm not wrong, we started charging the transaction fee. So we started getting some revenue, even that means we have started getting revenue from the options also now. And of late, and during the recent months, we could see that the volumes have further scaled up. Like in the month of April, we could be able to do something about INR 17,000 crores. And again, in May, we again, we witnessed it to something around INR 19,500 crores in options. So clearly, we are seeing that a lot of business is coming from options. And we really wanted to scale up our initiatives -- educational initiatives and also the product innovation in case of options contract. Recently, we have applied and also we have received the approval for our monthly contract -- gold monthly contract. So we were also having the gold kg contract, kg options contract earlier also. But the only difference is for the same bimonthly contract, we have monthly contracts. So put it in a different way, it is like we have bimonthly futures contracts. And when it comes to the options, these are all options on futures contract. And we have at least two series -- different expiry series of options contracts that will get devolved into the same bimonthly futures contracts. So that way, it is like we could able to see that, we can able to reduce the duration of the options contract because in options, the premium is significantly get impacted by the duration of the option contract. So higher the duration to the expiry, higher -- now automatically, the premium is going to be higher. That can dissuade some of the market participants who wanted to trade with lower premiums and also generally some set of [ retail in ] lower premium contract and some prefer even the out-of-the-money contracts, that kind of the way they look at it. So considering these factors, we have applied to SEBI and also, we received the approval. But of course, there are certain queries are there, and we, again, we have approached the SEBI in that matter. But soon, we would be coming out with these contracts. So hopefully, that will also will be well received by the market participants. That is on the gold kg contract. Besides that gold kg, we also recently had come out with the Gold Mini options contract. So the earlier, whatever we have launched, that was an option on [ goods ] contract that was not successful despite our efforts and despite -- we came out with the liquidity enhancement scheme in the initial period. But now we have converted that one into option on future contracts. So that is again well received by the market participants. So it has -- very recently, it has been launched. But we are hopeful that, that also will add to the -- another bouquet of the products, which are liquid on our Exchange in the option side. So these are the things we are really looking up on the product side. And you also already would be knowing that apart from our regular contracts, we are also looking for some of the newer products like aluminum alloy, steel, TMT, electricity. So these are the products still in the pipeline. And as and when we get the necessary approvals, we are very keen to go ahead and launch these products. So this is one side of it. This is on the product side. On the participant side, still we are expecting that soon foreign investors will be allowed to trade in this commodities market. And the SEBI also has floated a discussion path around that one. So we are expecting that soon, maybe the SEBI may have to take it to their Board and accordingly, then they may consider allowing this foreign investors in the commodity derivatives market. So we are expecting that, that should happen anytime during this new financial year. So this is on the participant side. And we also see that gives some issues related to the GST and all those matters get addressed then we can see that the delivery volumes can really, can pick up. That is one thing. So significantly, in the last quarter, in the month of March, because of the debacle that happened at LME, and we also had suffered in terms of nickel volumes. Nickel volumes also has significantly dropped because of the high-margin impact, and there was a very wide movements that happened in the nickel contract. So that all have had a greater bearing on this nickel futures on our Exchange. And we are looking at the way it needs to revise that particular contract, again, because that had been one of our flagship products, along with other base metal contracts. So that's the way I'm looking at. Another part, you already know that last year, we also had experienced the suspension of the crude palm oil contract. So that also has dented our volumes. Otherwise, it was doing pretty well. Crude palm oil was doing pretty well at that time. It was clocking around INR 300 crores to INR 400 crores. But this has really, the suspension has really has impacted on that contract. But we see that we have made several representations to the government, ministry and other people. We assume that once this kind of tight situation gets relieved, I think then we can expect that the government can lift off this kind of ban on these commodities. We all know that the crude oil is -- crude palm oil is just the imported variety and imported one that we don't have any say in terms of pricing. So despite that -- while banning the other edible oil contracts, even this has been suspended. But we are hopeful that it should be -- soon will be that kind of things will be the past and we will be -- could able to revise these contracts back on the platform.

So thanks for the detailed input that was very useful. But sir, my point is if I have to look at the futures volume, when we look at the bullion and as well as the energy basket, there, what is the view in terms of how we can see the overall growth in the turnover? And this changes in the Gold Mini and then bringing in gold kg, how much this can add the volume overall from the turnover perspective? So what could be the incremental growth from here on, we can see in the turnover in FY '23 as well as '24, sir?

So while I won't be able to give any particular number to it, but what I can say is our objective is to enhance the basket. Because the volatility plays a very significant role in all the commodity, whether it is the futures or options, okay? Even if you could see our volumes over the last maybe 3, 4 years, at different point of times, different segment has contributed to the volume. That means significant volumes. So one point of time, the bullion commodities played a bigger role and subsequently, the energy. And one point at time, the base metals. So it all depends upon the volatility in different segment that is where actually we are well placed. We have a very diversified product portfolio. That means from the metals -- precious metals, and we have the energy product. So these are all, in a way, interlinked. That means whenever there is economic growth that is going to take place, we have the metals that will kick in and they will play a bigger role. And if we have some kind of political uncertainties and other things, the precious metals play a role. And later, you know that the energy have been playing a bigger role, especially in both the options and futures. So that way, it is like we are -- our intent is to enlarge the basket, keep the counters liquid. So that whenever any particular product segment is volatile or if there is going to be more interested in that kind of commodity, it should be like -- they should be able to trade in those products. That is how we look at it. Of recent...

Hello? Sir, sorry, sir, my line got disconnected. I got disconnected at the point when you were saying that the volatility can increase the overall uncertainty around the economics. Yes.

Yes. So the point I would like to bring here is, the more important thing is how you can be able to diversify your portfolio because that is key element because we cannot say that this year, which product is going to play a bigger role, okay, because that again depends upon volatilities -- and could you able to Mr. Charanjit -- could you be able to hear us or is there any interruption?

No, sir, I can hear you now. Yes, yes. My line had earlier [indiscernible] but I can hear you now. Yes, sir.

Okay. Fine. So that is what we were trying to say that we are working on enhancing the basket and divesting the products. So options is now is one of our priorities. So we are working on introducing more and more innovative type of option products like this is -- like the way I've said, we come out with a shorter duration option contracts in case of gold. And even if you look at our silver contract, even it has certain amount of liquidity, decent amount of liquidity there. In that case also, the futures of silver are all the bimonthly contract. So the moment we come to know or we know -- the moment we come to know how the gold contract will pan out over the next 2, 3 months so definitely, we can come out with even monthly contracts for silver contracts. So the intention is clear, we wanted to have a wider basket, a diversified basket. And as and when the volatility hit or anything, we should have the products ready in the market so that the hedges as well as the other market participants can be able to enter into this space.

Sir, but that is the issue, when I talked to the corporate. So here, right now, if I look at MCX participation, there's no hedging which is happening. It is more of speculation or the retail participants, which are there. So because of the lack of liquidity, which a lot of corporates have told me which keeps them away from participating in the MCX. So what are your thoughts process to attract the corporates to come to the market and hedge, which has not happened until now. Plus even the financial institutions where you talk about the foreign investors, but mutual funds and other intermediaries who were also expected to participate, they have also not come to the market what we were also expecting earlier?

Okay. So coming to the hedges. Generally, the hedges participation is more visible in the [ proportional ] limit as compared to the [ nonproportional ]. Open interest as compared to the volumes. And this open interest, whatever we have been witnessing, in that case, there is a significant participation of -- participation in there from the hedges. For example, recently, we could see that in the month of March, around on the long side in case of gold, 22% is from the hedges. And on the short side, again, we have something about 78% that is coming from the hedges. And not only in the bullion contracts, even if you see the metal contracts, significant amount of deliveries are happening. So I don't see that. Only a speculator will be well placed to really participate in a physical delivery. So if you see even the delivery that happened over the year, the last year and this year, we really have witnessed a greater delivery in case of base metal contracts, which have been -- recently been converted into delivery-based contract. So that way, it is like we -- by converting them into the physically deliverable contracts, we have, in fact, attracted many other -- many hedges into these contracts. So this is on the base metals. But if you also look at the bullion contract, you know that RBI circular has come in this case. And because of that RBI regulation, the Indian market participants, the physical market participants, they won't be able to go overseas and hedge, especially in the gold contract. So there, we are seeing the very good participation that is coming from the hedges. So that way it is like -- we would like to say that it is like we are seeing a very good participation that is coming from the hedges side. But there is always -- there is a scope for further improvement. There is no denial to that statement. But hedges, good participation is there. And for any market because whenever hedges wanted to transfer the risk, we require the speculators. So we -- the speculators means, again, it is like not only the speculators will operate in this market. We have the arbitrages who are into this kind of business called cash-and-carry arbitrage are between the futures and options. So we find various category of participants trading in this market. So that way it is like the volumes come from the retail, you'll get from a set of the institutions and also from the arbitrages who are into this business. And this all will help the hedges in getting their risk transferred from one place to other, that way it is like they will be helpful. So that is the reason you require all set of market participants in any market. And coming to the other part of it, which you asked with respect to the financial institutions, so -- and mutual funds, so one of the major -- the problem that we have been facing is with respect to the GST issue. GST, you know that there are multiple delivery centers are there in case of base metals. And if at all, somebody wanted to participate in this contract, he will have to register across the delivery centers that we have across multiple states, at least for some 4 states. Otherwise, he will have -- he won't be able to raise that kind of IGST kind of builds to the buyers. So this is a challenge. And earlier also, we have made representations to the GST council on this one, even the SEBI has taken up the matter with them. And what we are seeing is if some answers comes in relation to the gold spot exchange which the SEBI has already has come out with the guidelines and framework gold spot exchange. We are expecting that we can also get some kind of answers. So that should -- really should be able to help our contracts also. That is how we are looking at it. In -- whether in case of bank broking subsidies and other things, they are now starting -- they are playing a bigger role, and they are also like [ ICICI ], HDFC, they're all now scaling up their operations. That way, it is like -- because we cannot expect that all will happen in one go. It will take some time, and it will pan out over a period of time. And of late, you've also seen that discount brokers are playing a significant role, and we could see that a good amount of trading also comes from this kind of discount brokering [ front ]. So that way, it is like well distributed, and we are expecting that if some kind of regulatory support comes, I think, we expect that those bottlenecks also will be weeded out and then we can expect that we'll get more triggers for further growth and development of this market.

Got it, sir. That's very helpful, sir. Sir, the other question is, what we have seen in the past, while we are ready with the products, we are having a thought process in terms of introducing these new contract, but SEBI's regulations have been one thing which has actually impacted our performance quite a lot. So -- and that becomes a very big regulatory overhang. They want to make this market as strict as what is there on the equity side. So how we should look at SEBI's thought process going forward? Are there no further regulations which are going to come, which can make the commodity markets difficult for the retail participation as they want to institutionalize it further? Sir, what is the regulator's thought process here because that is what has been impacting our performance also to some extent?

So the new regulation, what kind of regulations will come, it's always -- it is a question mark for anyone because even the peak [indiscernible] reporting, no one have really have expected some time back, but suddenly, it has come, and it has been introduced. But some amount of dispensation has been already given by the SEBI in that case, like the way what they have said is if already [ positions ] are there and no fresh [ positions ] are being taken, and irrespective of where the [ positions ], where the margins will go intraday, that will not be considered. And we will look at what kind of margins have been already placed with the member by that client with respect to the previous dispersion that we look at. And based on that one, we will see that whether any violation happened or not. So that is really one good differentiation that has been given by the SEBI so that the hedges will not be impacted. Hedges who generally will not do the intraday trading. Those people will not get impacted because we do the margin calculation and [indiscernible] calculation multiple times a day. And because of the price movement, suppose the prices can go up or down and also because of the volatility movement that the requisite or required margins may go up or down. So if we calculate the margins -- peak margin based on that relevant point, whatever is the margin, then it is very difficult for the hedges to operate. So that is -- with this kind of dispensation that should be -- definitely should be a win-win for the hedges so that they can able to hold their [ position ] without worrying about -- more worrying about the intraday margin [ calls ]. That is one thing we can say that. Now coming to other regulatory challenges, while we look at it like we have to find a way that is how it has been happened in case of options contract, this has been introduced. But after the introduction of this peak margin and other thing, even the market participants also got used to trading in kind of commodity options. And so we need to -- while these kind of valuations will be keep changing, and we expect that always the regulator will have a vision, and we will be expecting they will also have a growth plan in mind as how this market has to be taken, that means have taken to a higher level. So have -- given the limitations and given the -- whatever things we have, we have to find ways and means to take our growth plan.

So sir, in terms of this margin requirements, what can we do to lower the margin requirements and -- which can help us push the volumes? Anything as a company we can do?

So one thing already we have taken up with the SEBI that is regarding the flexibility in the SGF infusion because currently when, if at all we put some money into the SGF, again, we won't be able to take it out, okay? So because of that one, in certain commodities like crude oil, we had to impose some additional margins, okay? So maybe around 10% or something we had in the past, we have imposed that kind of margin. But the movement -- if we can able to overcome this kind of issue, which we have, that is what we have proposed to the SEBI, that if it is made two way, that means whenever it is not required -- if exchanges or clearing corporation or -- is allowed to take it out and whenever need arises, we can -- we will be able to deposit. If that is the case, we will be free to contribute to that this year. So that's -- because we -- whenever it is not required, we can take it back. So that way, it will not be impacting us much. So the movement that kind of dispensation comes to us, SEBI gives us, then I think it is very much possible that we can able to reduce margins in some of these commodities like crude oil and even in case of gold, where we have currently put some additional margins.

Okay. So what is the, sir, additional margin right now we have put in? And by when we can expect some kind of a positive move from SEBI on this?

So SEBI is planning to take it up with their RMRC committee. It is a separate committee which looks into this matter. So SEBI will place its recommendation and that will be deliberated upon in the next RMRC. So we need to wait and watch how this is. Otherwise, we are very positive on the account that, that will be reasonable and acceptable to the regulator as well as to the RMRC.

But sir, any timelines when will this RMRC happen and...

It's very difficult to say when it will happen, but we can say that maybe some time anywhere in the -- maybe last quarter or last -- but this, I can say, last quarter of this calendar year or maybe earlier also. But the moment if it happens, I think we can expect that something, some positive development can happen so that we can really can -- that kind of dispensation is given, definitely, we immediately will look into bringing down the margin. So that will really will further help our products.

Okay. Sir, on the option side, if we can touch upon, there, also we wanted to introduce more of option contracts. So what is happening on those new maybe some indices base, if I remember right, we were thinking of introducing. What's the update there? And then in the options, what is the kind of transactions we see are charging and can it go up?

Currently, we are not looking for any changes as of now because we have started charging very recently. So again, we don't want to relook at it immediately. But unless the Board takes a call on it, that is a different thing. But currently, at least we are not -- immediately not looking at it. Even the charges are quite comparable to that of what is being charged in the equity markets, okay, whatever we are doing. So that way, it is like -- it's at a level playing field. Coming to the index options, currently because of the debacle of nickel contract, we also had witnessed this kind of short turnaround. That means turnover has dropped in case of our METLDEX which is -- which was also -- was a successful contract till March 8 when that incident took place. So it was doing something around INR 200 crores to INR 300 crores of turnover on a daily basis. So we were -- at that time, we are very positive in introducing the index options in case of METLDEX and maybe also with BULLDEX. But because of this kind of unforeseen events, we now are waiting for revival of our nickel futures contract. Once I think it comes back, then I think we expect that even our metal index also will start doing well. So subsequent to that one, immediately, we can consider introducing some metal futures. That is metal -- sorry, metal index options also. In case of BULLDEX, anyway, we are keen to come out with some products -- index products -- index option products. Maybe we are also soon considering the serial weekly options. That is one thing that is quite popular in equity market. So we are also looking at closely monitoring this one, and we are seeing that if things all goes well, we definitely would come out with that serial weekly gold options contract also in BULLDEX. In case of other option contracts, already I told you that we are trying to reduce the duration, the time to maturity for gold contract and also the silver contract because the contract has -- already has gone up because of the increase in the price -- because of the increase of the prices. So alternatively, we are looking at by reducing the time, we can able to substantially could be able to reduce the premiums in the option contract. So by doing that, we can expect that more participation will come into our bullion contracts also.

Sir, in terms of the split, how much will be arbitrages? How much will be hedges and retail? Can you give me some further split on this, sir?

See, currently, we don't have that numbers per se, but we're already sharing the algo-trading numbers, right, in our -- the presentation -- investor presentation, we have shared that one. And also, we have shared the proprietary versus the client turnover details like in case of algo-trading, in the FY '21 and '22, it was about 48% algo-trading, okay? Non-algo is 51%. And prop versus client, it is about 39% is from prop and 60% is from clients. So you can make out from this one. I think what kind of -- because the nature by looking at algos generally would be more involved into the intraday trading. But it's not -- simply we cannot say that, but I'm saying there is more possibility that there will be more into intraday trading and also they look at kind of cash-and-carry arbitrage also.

Okay, sir. Sir, the other thing is when we just try to do some checks in terms of how MCX is doing in terms of -- so we get to understand, one, in terms of the manpower, talent pool, what is happening on that side? Are we hiring senior people? Because now this is becoming more technology-oriented work. So how we are trying to strengthen the team? What kind of profile of people we are getting? Or -- and how is the attrition level? Because if that is there and the team is not that motivated, then also it creates an issue in terms of bringing new products and scaling up the platform.

So recently, in the past 6 months, we have recruited two senior people in the technology side. We have got a new CTO, Mr. Sathe; as well as we've got a new CDO, Mr. -- Dr. Rajendran. We also have appointed a Chief Operating Officer. So we are strengthening the team, so we're aware of it. I mean, being a technology-driven company, we do understand the challenges that we face, but we are prepared for it. It is a challenge, but we have recently recruited at the senior level and at mid-levels also.

Okay. And sir, on the technology side, now we were also having the software migration, which we are doing. If you can touch upon how is that migration going on? How much of the cost, which you have already incurred? And does our technology costs expected to go up further? And how can the earnings get impacted because of this migration, which we are seeing?

Yes. So I mean, you're aware that we presently with the present vendor, we have a fixed charge as well as a variable component, which is linked to our transaction charges. So going forward, under the present -- post October '22, so we'll be paying -- once we go live for the first year, we're only paying -- it will be under warranty. So there won't be any charge that we'll have to pay to TCS. Going from October '23, we'll be paying them a single digit in [ crores ], single-digit amount. And it is fixed. It is -- every year, the incremental AMC that we'll be paying to them is fixed to the wholesale price index. So it's all fixed. So it's reasonable. But there'll be additional -- we would also be paying license fees on operating software like Red Hat and Linux and all that. And also, there'll be an additional amount that would come in as amortization on the platform as well as on the servers and other equipment that we'll be using on the platform, which would be -- we'll get more visibility as we go forward. But that would -- and we'll amortize it over a period of 8 to 10 years to take care of the [ P&L ]. And generally, trading platforms are amortized over a period of 8 to 10 years. So that is how we plan to take it forward. And there's already mock trading session, which has started with our members. So it's been released to the members. So there's progress on that. And I think we intend to go live from September, October. Timeline is 30th September with the present vendor. So before that, we intend to go live.

But sir, like you would have done your calculations, but from earnings perspective, whether it is going to be accretive or dilutive, how we should look at that?

I think as I said that we won't be -- we're only paying any additional variable. It won't be linked to any additional earnings that we made. There's nothing that we are going to pay to the vendor, right, which we presently are doing. So anything that we earn now, there's a variable component, which is 10.3%, which is linked to the transaction charges that we earn. But going forward, we won't have that component.

Okay. So in that way, then -- even if we have this amortization and all those things, so then we are saying it may not be earnings dilutive?

That's it.

Sir, on the electricity side, we have talked about this -- what is the status there? And when do we see those contracts getting launched?

Currently, as you know that we already have filed our application earlier with our regulator. We are awaiting actually because they have formed like committee -- joint committee between CERC and SEBI. So as and when they approve it -- that means they're also looking at it, so as and when they approve it, definitely, we'll be going ahead and launching that electricity contract. We are very positive, but just I think let's see when they are going to approve that one. Otherwise, we are prepared.

And sir, any thoughts like what is the outlook on the gas futures? Is that the gas futures may go down, oil may come up? Any thoughts there?

Gas already it is getting traded. So I couldn't be able to make it. What exactly you're asking for?

Sir, in terms of the volumes on the gas side versus the crude, so any thoughts on how we see that? Whether you see gas trading turnover going up or down? Any outlook there?

So like you said, the volumes will be dependent on your volatility in the underlying commodity. So the moment, if you get more volatility in that commodity, definitely, I think that will push up the volumes in that particular commodity. Of late, we are seeing that a lot of volatility in the natural gas. And the volumes, we have got very good volumes from natural gas options as well as futures. But we cannot say that how the things will pan out over the entire year because you know that -- it all depends upon the volatility and many fundamental factors will influence that particular volatility.

Okay. And sir, is there a possibility of any increase in tariffs in any of the products?

No, no. I think [indiscernible].

At presently, I'm not looking at it.

And as Praveen said, they just started charging on options in -- from October. So we'd like it to stabilize. And I think we should also remember that because we had launched options in -- sometime in 2017, it took some time for the traction. And in all calls, we were asked when are we going to [ be charged ]. So the fact is that we have the product and it was -- and new members could -- and clients could move from futures to options because we have the product. And we have been able to take care -- ensure that our volumes have not been affected badly, transaction charges have not been affected badly because we had options in place as a product.

Got it, sir. Sir, lastly, now in terms of the cash surplus, which we'll be generating, how do you -- any specific usage in terms of special dividend or -- how the management thinks about that?

I mean we do not intend to hold more that what we need. So I mean, the dividend policy is clear on our website. So we give out 75% of what we earn every year. And as we have mentioned in earlier calls, we need to have some cash for the colocation and some cash for new products. Maybe if you are to launch some new vertical under different regulators, so then we'll have to meet those minimum net worth criteria. So that's why we need some cash. But as and when probably -- once this [ CDP ] project stabilizes and we are clear, I'm sure the management will take an appropriate call with the blessing of the Board.

Got it, sir. So sir, that's all from my side. I think this was very helpful. Thanks a lot for taking time out and apologies again from the last time we could not connect. But thanks for taking our time and sharing the views on the company. Thank you.

Thank you.

Thank you.

Thank you.