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

Good evening, everyone, and thank you for joining in. I'll just take a quick introduction. We have with us our MD and CEO, Mr. Reddy; we have Satyajeet Bolar, who is our CFO; and we have Mr. DG Praveen, who's the Head of Investor Relations. You can take this forward.

Yes. Thanks, Lavina, and good evening, everyone. Thank you, sir, for giving us this opportunity to host the call. And so we can start with a few opening comments from your side on how do you see the outlook now for MCX with regards to the risk parameters on the business front. And then possibly, we will open the floor for questions. Over to you, sir.

Yes. Go ahead. Welcome to this investor call arranged by Motilal Oswal and I think specific to a group of 5, 6 analysts. Please go ahead and ask questions. I think none of you are new to the business industry. So I wouldn't stop taking time and then explaining what's happening, what I think I request all of them to fire questions as they think is so appropriate.

Sure. [Operator Instructions] So before the queue starts asking the question a couple of participants who could not join and had e-mailed a few questions to me. I'll throw in a few of them and before the others start pitching in. So one of the questions that has come in is the expectations on the outlook for futures volumes that post the margin norms they have been declining. So what are the regulatory changes that would be needed? Or what do you think would be the next trigger for improvement in futures volumes that can be seen going ahead?

See, the futures volume, I think post increase in these margins is more or less remained at INR 25,000 or INR 26,000 crores ADT. And this is mostly confined to the crude oil. But otherwise, in NG and other things, there's no such effect of negative pricing. So that is depending on the volatility in the market. Then, that is also rising, okay? Having said this, I think crude oil features is expected to be pushed forward once we get some relief on the SGF related actions, and we have said that SEBI should give us option to contribute and withdraw to the SGF fund, whenever we wanted to, whenever there is a requirement of SGF cover. Today, if we reduce the margins on crude oil being a larger contributor, our SGF requirement increases, which we'll do it. But once we contribute, today, we don't -- we are not allowed to withdraw if the crude oil contribution comes down. So that means it's a permanent loss to our -- hit on our balance sheet. By the end of this month, we expect the SEBI RMRC to meet and then take a decision on it. So once that decision is taken, we will be able to increase our contribution to SGF and reduce the margins on crude oil, then you will see some kind of traction -- upward traction in this. But all other products are, I think, doing well, but that is a permanent damage in the form of peak margin circular. So that will stay. But I think the crude oil is not doing as much as it thought to have done. I think that will again pick up.

Okay. That's helpful. Rithvik, you've clicked on the Raise a Hand icon. Please unmute yourself and ask questions.

Sir, thank you for arranging this and doing this with us. Sir, I have a few questions. Firstly, sir, starting with one fundamental question I have. It's like -- so comparing MCX with equity market, in equity market participants come to invest in various sectors across varying like from commodities to FMCG and so on. So in commodity markets, according to what is the fundamental reason for a participant to enter the market like apart from speculation, what is the fundamental reason to enter the commodity market? If you can throw some light on -- what are your thoughts on this? I would like to understand.

If somebody does a fundamental research analysis, then each product is different and their number will be different in terms of understanding wise. But if you pick up Reliance and ACC and then everything converted into numbers, they are on financial numbers, it makes one single sense. But that's not the case with commodities, okay? There are so many geopolitical factors. There are many -- many production-related issues, okay? And different industries which are consumers of these metals or these products may be experiencing different cycles. All those things are to be studied. Each commodity is different in that sense. This is one important factor for people to understand this. Second and important is that the GST is a major concern for anybody to keep a product, I mean, buy it and then keep it on hold and then sell it back, they can't do it unless they have a GST registration, okay? And I don't think retail investors will ever have GST registration. Okay?

Sir, then, talking about the physical part of it, right?

Yes, physical part of it, it is almost all [indiscernible], okay? But if somebody wants to take delivery of the gold and then take it home, it's fine. But if they want to deliver it back, then they will have a problem again. GST is an issue, okay? And so -- but that's not the case with equities. You buy something and then maybe after 6 months down the line, you can sell it off, okay? These are the challenges at this point.

So who would be the drivers in terms of new participants coming into the commodity market apart from the existing ones over the medium to long term in your opinion?

One important -- I mean there are 2 types, I would say. Of course, speculators are speculators, they are everywhere and they take the price difference irrespective of the commodity. So they understand what -- et cetera. That is one part of it. And that's happening, okay? The second set is [indiscernible] hedgers and the physical market players. They have these numbers and they are the ones who actually are being targeted by us. It is also equally important to understand our products. The -- what we call trading unit is very, very high. It requires a big capital also in that sense, margin -- in the form of margins, et cetera. And because ever since SEBI made trading unit and delivery unit is the same -- in the case of nickel, for example, it is almost all INR 40 lakh contract. I mean -- and INR 40 lakhs, even if you were to have a 10% margin, it's INR 4 lakhs. Just one lot. So trading is not so easy to do it in that sense. So it's another challenge. So our target is to have more and more physical market players.

Sure. Okay. Sir -- and a few questions on Algo trading. You mentioned in the last call that we are looking to increase the turnover from this segment. So I believe we are currently close to 50%. So what percentage of revenue would you like to reach and then you would say that this is a fair percentage out of the total turnover for Algo trading?

I didn't understand what your question is?

So we are about close to 50% of total turnover in Algo trading?

More than that. It is 60% -- 64%.

More than that. This quarter, we are 56%.

56%.

Right. Right. So -- and you mentioned in the last call that we are looking to increase the percentage of Algo trading. So what would be an ideal...

So I will tell you -- clarify it what I mean is, okay? What I'm saying is -- no, no, concentration is increasing is the concern that was expressed. So what I'm saying it's bound to increase because more and more Algo players are coming, the HFT players are coming. And -- so it's bound to be there like that. And they will increase to 70% also, but we are not worried about that. Because they are more like, what should I say, I mean, the day traders, essentially, they don't keep any open interest in...

Right. Right. Sure. Sure. And what is the difference of pricing in Algo versus non-Algo customers?

There's nothing. No difference, pricing between Algo and non-Algo. We have only 2 slabs. And based on the turnover, they either fall in the first slab or second slab, okay? So up to INR 350 crores, it's about INR 267 per -- INR 260 for INR 1 crore and beyond INR 350 crores, INR 175 per crore they pay.

Okay. So this is called day, right? INR 350 crores per day?

Yes.

No, [indiscernible] in a month we can't get the average.

In a month, yes.

On an average, we can calculate -- on an average what is the daily turn and based that one, then we will see that in which -- but again, it is like incremental slab. It's not like...

It is like income tax slab. So both -- everybody will pay up to INR 350 crores, whatever is the number? And then beyond that...

Correct. Correct. Got it. Got it. Right. Right.

Similar slab is there for option, but it is [indiscernible] turnover.

Sure. Got it. Got it. Right. And sir, what can be the new products that we can introduce on our platform?

One is the electricity features contract. That's one we are looking at it. And we have to get one, what we call, gold options on 1 KG monthly options, on 1 KG futures contract. And we are also waiting for approval of aluminum, what we call alloy, okay? And there's one -- what -- which is meant for essentially the automobile industry. The other one is the steel TMT bars and we were looking at options on gold index features also. But let us see. We will apply for it.

Sure. Sure. And sir, just 1 last question from my end. Sir, what is the net cash as of June 2020?

Around INR 1,100 crores.

INR 1,100 crores. Okay. Okay, sir. Thank you.

[indiscernible], you can unmute yourself and ask your questions. Please go ahead with it, sir.

So my first question is, what is -- management organization is basically doing to address the issue of liquidity in far month contracts. So if you can elaborate what steps are you taking -- are you interacting and whom are you interacting. Anything on those matters?

Okay. See, I mean the Board was [indiscernible] introducing any LES, liquidity enhancement scheme, okay? And the price we had introduced in the past I think we didn't yield expected results. But spent was done. I mean, whatever was to be spent, we spent it. The second thing is for far month contracts, we have hauled the transaction fees. Then we have evaluated after 3 months, whether it has yielded any results or not. We didn't find that it has yielded any results. So keeping that in view, I think the -- as the players increases -- number of players increase in the market, especially the -- what should I say, the hedges and the physical market players, I think the far month contracts will start getting themselves liquid.

Can you talk about any activity in those physical entities increasing any traction of hedges? Or as an organization, are you interacting with any of them to engage in future?

Of course, we have been on a one-to-one basis as well as along with the industry associations. We have been actively engaging it and in fact, we have conducted, what you call, education series for CFOs of some of the companies. We have engaged with SIDBI, which is giving loans to the small and medium enterprises. They have organized meetings with their customer base essentially to tell them that how they can hedge the price risk, and because if they don't hedge it and they will go under the [indiscernible] then even the loan will also go default -- they will go default on the loan also. So we have shown them the way forward. I think it's happening. But then these efforts really take time to fructify. And I'm sure as we go along, more and more such engagements will be done. It's a continuous process, of course, and more and more will join.

Sure. Would you like to offer any qualitative comment, I mean, how has been the traction? Or any, I mean, increase last couple of years in terms of hedgers or physical entities joining and participating in the exchange?

Almost all 10% to 15% hedges participation has gone up in the exchange. So that is the way it is.

Got it. Sure. Secondly, like recently, there have been few adverse regulatory changes with regards to discontinuation of mini contracts [indiscernible] compulsory delivery in base metals and peak margins and all. So there have been quite a few headwinds. Do you expect any reversal or any positive kind of a regulatory development, any impacting business?

We expect some mini contracts, at least in some metals contracts is expected to be -- I mean, SEBI is relooking at it. And especially when the value of contracts have gone up, as I was explaining earlier, the nickel has become almost all INR 30 lakhs, INR 40 lakhs; copper is around INR 30 lakhs, okay -- INR 25 crore to INR 30 lakhs range. I know that's too expensive for any small players to participate. So they are also seized up this matter. I think we will bring back those mini contracts. That's what our hope is.

Nikhil, you can unmute yourself and ask the question.

Sir, I have a question on the employee expense. So going ahead, how should I look at the employee expense? Is it more variable in nature? Or is it fixed in nature?

Well, see, in this, our commodity derivatives platform, we have engaged a lot of people for executing the project, monitoring the project and testing, et cetera, et cetera. Maybe going forward, again, not immediately. I must say that for the year '22, '23, it may remain the same. But maybe '23, '24, some of these platforms are stable and all that, some may leave also even. So somebody -- some people leave, then we may not recruit in their place. So I think you can look forward for a tapering down of these expenses.

And sir, I want to understand whether it's fixed in nature or how much is the variable part in the employee expense?

Major component is fixed. So this is a variable component, which we have a budget, which is approved by the Board in which variable component is approved.

So variable component is about INR 7 crores, INR 8 crores and maybe next year, it would be INR 10 crores. That's the way it is.

Again, it is based on the performance.

Performance, yes.

Understood. And secondly, why is steel not traded in the exchange currently, what are the challenges faced in that?

Again, please?

Why steel contract not traded on the exchanges? What are the key challenges why steel is not traded?

When you say steel, I think you can be specific. But we have applied to SEBI steel ingots, not steel TFT bars. So SEBI has not approved as yet. That's the only thing.

So I mean, as of now, it has never traded on the exchange. So what is the reason for that? Is it the contract size or I mean, the storage issue?

It was introduced a long time ago. And it was discontinued because there was no steel standard. It was not -- ISO standard was...

No standard was there. BIS standards were not there. That means the industry has not -- then it was not adopted. But later, they have adopted. So our contracts was -- a long time back, it was launched, very long, almost 10 years back or something have launched. So at that time, we could not be able to get much traction from the market. But now with revised thing, with the standards are in place now, we are looking for the contracts like steel TMT bars, other contracts.

And my next question is on the technology side. Given that our current contract is with 63 Moons expiring on September. And you have said that because of some issues in the new platform that you are evaluating, you may continue with 63 Moons. Now I have a question whether -- whether they would be okay to continue for a few more months or whether they would be looking for the longer duration contracts?

See, we wanted it to be for a maximum 3 to 6 months' time. That is the way we have requested them to extend the contract, okay? And TCS platform has been deployed in the sense for UAT and others. Lot of bugs are coming. So it will take some time to stabilize. So we asked for 3 to 6 months. And as an exchange, we have a right to use the platform. But being a market infrastructure institution, without the support of the vendor, whether it is advisable to go and then use it is the question. And so we don't want to take that risk. That's why we have asked them. But our licenses are perpetual, most of them.

So is it possible that 63 Moons may ask for the longer duration of contracts? And you may have no choice but to go ahead with them. Like, if they ask for...

It's not necessary if we are -- we are looking at 2, 3 alternates also. It's not just 63 Moons only.

And the other alternative, are they -- I mean, the cost benefit is equally similar to TCS or if it would be slightly expensive?

No, no. There's no question of replacing the TCS thing. We are only looking at alternatives, vis-à-vis the transition phase, how do we manage it. That's what the alternative plans are all about. So I think we -- we shouldn't be what you call, foretelling anything about the -- whether 63 Moons will accept, doesn't accept.

The reason I'm asking because of the current contract is ending September. As we are already in August, you might have already started testing of the other platforms?

Yes. We have already asked them. They are yet to come back with the response.

Okay. And just one more question. So now the future volume, I think when you have introduced an option contract in the -- for the nickel, that time, I think the requirement was that minimum underlying futures should be more than INR 1,000 crores. Now that is reduced to almost negligible. So will you still be able to continue with the option contract in the nickel? What does the regulation say on that? Can we cancel the contract?

See, we can keep it for about 3 years, okay? So there's no bar on it. But then if the features itself is nil. And these are options on futures. So the future contract is not liquid. Options contract will not be liquid anyway. So we need to activate it. And that's where we have asked SEBI to give us a smaller contracts, which they are looking at it.

[Operator Instructions] Sir, just extending nick -- one of the Nikhil's point on technology. And on the call, you had mentioned that the savings together on the EBITDA front, when you know there will be some savings, but depreciation will be higher. So is it that together, both of them the savings on the operational front, the operational cost front and the increase in depreciation will not lead to any material savings overall from a profitability perspective on the TCS platform is taking?

There will be a breakeven depending on the volume because now the technology costs are fixed, okay? Now there's nothing called a variable cost. Now -- so whether the cost will be lower or not depends on how much more ADT we will clock. So the higher the ADT being fixed one, the costs on our technology are fixed, probably we will be able to see a better path. That's what we were seeing it. But today, even if you do well in ADT, a part of it goes towards technology. That costs also increases.

Just say possibly I'm pushing this question again. At current levels of volumes, do you see significant benefit if the TCS was implemented today?

Yes, of course, it is.

Of course, it is. Right. Okay. Okay. And 1 more question, which I was given by 1 of the [indiscernible] participants. What's your thoughts on option volumes. Option volumes have actually gone through the [ roof ], and we've seen that on the equity side as well. Globally, what are the phenomena in terms of equity volumes -- in terms of option volumes in other commodity exchanges? And do you see that the option volumes today are closing in on the future volumes. Do you think that there can be like 2x or 3x of futures volumes in, say, next 3 to 5 years?

Yes. Our markets are definitely not comparable with of global markets. In fact, options are quite popular in Indian markets. Even if you can see in equity markets, most of the turnover is coming from options only. Globally, just to give you a perspective, it is roughly about 15% to 20% comparable to that of the futures turnover. That means it is dominated -- there, it is dominated by futures turnover. But Indian markets have been different and also supplemented by commodity transaction packs and other things. Definitely, now with the peak margin reporting, definitely, it is wavering the option contracts.

Okay. Okay. You got that. And another question was on -- in terms of pricing, do you see the potential to increase pricing in both futures and options? What are your thoughts there?

Look, as I have explained, in the case of options, just last year, first October, we started -- I think it is too early at this point to increase it or tinker with that. And even the realization rate also is very good. We didn't expect it to be so much. Earlier, we thought it will be only 33%. We realized now it is 48% as that of features. I think that's a good development. It also indicates that most of the option trading is taking place at the money or near the -- in the money or near the money kind of contract. That's why the premiums are high. And I think we should allow that to -- not to touch it. When it comes to the futures. Many of the major players who are Algo players, they desire to be further reduced. If we reduce it to the one set-up players and don't do it for the others, then probably we will face maybe regulatory scrutiny. I don't want that to be done anything. And at this point in time, we should retain as is various basis.

We have a question from [ Rukun ]. [ Rukun ], please go ahead.

Can you talk a bit on the participants in the option market? Are these largely the same participants that are there in the futures market? Or is this a new set of participants? And are you seeing the same set of participants shifting from futures to options because of the margin growth thus far?

You have seen that shift. I mean you know that currently options are primarily the crude and NG. And while NG, a part of the crude -- I mean, part of the crude crowd, which was earlier trading features, they have deserted the market post negative pricing, and they have come back substantially. So they are participating in both NG as well as in crude oil. And new participants are -- anyway are joining that growth rate is also a good one. That's the way it is.

I'll give the numbers, maybe you will get some good idea. Like this quarter, like Q1, futures and options put together, around 2.38 lakhs clients have traded, okay? Compared to corresponding quarter of last year, it is about 2.23 lakh clients who have treated. So that is the picture. But even if you look at maybe the drop that you would like to see in the future is lower compared to the gain that the exchange has seen in terms of clients participated in the options. So that way, there is an overall growth rate, but there is a marginal drop that happened in the futures, but there is a significant growth witnessed in the options contract.

Yes. Thank you so much for that question. Sir, another question that had come across was on the -- whenever the gold EGR or the power electricity futures are launched, do you think that these have long -- have huge potential of revenue and profitability? What kind of potential you see on this?

See, electronic -- I mean, what -- electricity futures is something which I am competing very big. But of course, gold EGR is essentially the spot market gold spot exchange. And it's not going to be too big a market my gold spot is going but it helps us in -- it helps to hedge on the exchange platform for those who are trading the spot, if somebody has taken a delivery and they can definitely can hedge on the exchange platform. That's the way we look at it. So it collaborates or complements each other. So to that extent, there will be some marginal impact. But electricity futures is completely new and the consumers are also very big consumers going to be and be that consumers are -- the producers who are going to trade on the electricity features, they are going to be big ones. So it makes a big difference.

So it's similar to something what IEX has. And so how would you compete against IEX?

IEX is a spot exchange. It's nothing to...

Okay. Okay. There is no -- there is no competition. Perfect. Perfect. Okay. [Operator Instructions] I think, sir, we don't have any further questions from the participants. So we can end the call here. Thank you, everyone, for your time, and thank you, the entire team at MCX for giving us this opportunity to host the call. Looking forward to more interactions with you, guys? Thank you so much. Have a great evening.

Thank you.

Thank you, so much.

Thanks to all of you. Bye.