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

Welcome to MCX once again. And since you know the company, you have been staying invested over the last 2 years or so, please go ahead and fire the person who signed [indiscernible].

Thank you, Mr. Reddy.

I can also switch on the mic. [Foreign Language]

Thank you, Mr. Reddy, for the opportunity. I guess from my perspective, 2 questions and another comment. One is there are a number of variables that as senior management personnel, you cannot control with respect to the exchange, right, like how much volumes are being created, which commodity is being created. These are things that are natural outcomes of global macro and volatility. But what you can control is introduction of new products, educating the investor base and just trying to deepen the market from your perspective. So would love to understand over the next 3 to 5 years, what are the big changes or big themes that you see playing out as far as the commodity market is concerned in India?

Good. No, you're absolutely right. What we have been doing and what we will continue to do is to create a natural ecosystem such that as and when opportunities come, it will automatically translate into higher volumes. So that is something which we have been keen on doing here. So one is the products where we have -- we can introduce more and more products, which the market wants it. And the second thing is to increase the distribution, the kind of distribution of currency we have. Of course, the third will -- segment is the education part, which you said. Still, there's a lot of ground to cover in this area. And I only, what you call, expect the people to refrain from comparing the equity markets because in the case of the equities, the trading lot is one share, and then anybody can trade. And -- but here, each product is a unique one. Each nuance is something to be understood. So -- and even if one wants to get into it, there's something called a trading lot, and the minimum is what comes out of the factories for buying it. So down that, the margins are always very high. For example, nickel contract is almost -- 7 lakhs, 8 lakhs is the margin. So because the trading unit itself is costing -- 1 trading unit cost is as good as 1 sharing cost, so kind of 40 lakhs -- 35 lakh to 40 lakhs, depending on the price. So I mean, first, we need to understand the ground reality, and this is one major aspect of it. The second aspect of it is whom are we really targeting. That's another thing. While speculators are important for this market, as speculators do come and there's a natural, what we call, the growth rate will be for the speculators. And now there is an opportunity, they will jump in. Now it is the speculators who take the risk when the agents want to give it up, and the agent is not even giving up the risk. So they are very, very important for us at this. So our intention is to bring and build open interest. As much open interest as we can build, I'm sure more and more speculators will stay in these markets. So for that, what we have been doing is, one is to identify the bottom-up approaches of this actually. I'm not looking at the top guys because the top guys are anyway hedging it, and that is what they reached that maturity and who understands what is the purpose of hedging. So they look for -- given their size, they look for investing or hedging in international markets, and there's no ban on it except for gold at this point in time. So they are all hedged in international markets. Who don't hedge, by and large, those ones who do not have an international exposure who would not understand the concept of hedging. Our -- who are too small a player who cannot go to an international exchange and hedge even if they understand because the contract sizes in those international markets are very big.

Much bigger than what we have.

Much, much bigger than what we have. So when I position the MCX vis-à-vis the international exchanges, we always say this, "Look, we are catching to our domestic players. Our domestic players majorly are MSMEs." And if they come in and if they grow on this exchange, automatically, the other players will start to penetrate this market because it's an excellent situation for me. If I ask big players to come, they will see very good liquidity. And I want formal contracts, liquidity, et cetera, et cetera. So for a smaller player, whatever liquidity we'll have is good enough. So this -- for me, every drop in the ocean counts. So if the smaller players keep coming, the pool will -- liquidity pool will automatically increase. That's the way we have [indiscernible]. But at the same time, it's also a Herculean task because the smaller players, they contribute only so much. So we need to reach out pan-India through various means, be that education, be that one-to-one handholding, also our industry associations, okay, or some of the banks, okay, who have lent money to those, I want to call, industries, okay? For example, we have done a program -- since we have reached out to them, they're kind enough to [ harness ] some of the MSME's programs. Similarly, we will do it with many more regional centers of SEBI so that they bring MSMEs to this fold. Now understanding the concept is one thing and then actually playing exactly. I think that is where I'm coming to. We need to make this land or this particular ecosystem fertile enough for these people to germinate. Now that's where these ideas are planted. We do not know when they will actually start trading. Now we have seen also, again, it's a multipronged approach. It's not just, we just taught them, educated them and left them. No. We also identified some brokers and then said that, look, he is a potential candidate, so that he can keep handholding. Anyway, we can't directly deal with them, okay? They have to come through a member program. So a quality member broker, they pursue them. And then one day, it will happen. And in fact, we tell them, you may be investing in equities, okay? It's most likely that those equity members are members of our exchange also. So you don't need to bring in new relationship, build a new relationship. You just go back and ask them and show the solutions. This is the hedges part of it. Then it comes to the mutual funds, okay? And with mutual fund industry, AMFI, where [indiscernible], and I think it's likely that they will institute a committee within the mutual industry for them to actually meet and understand what are the issues that the industry is facing and refer them to SEBI. We have been asking the industry and [indiscernible] Bala have been engaging with him. So he has agreed finally. I think that will happen. Now currently, about 3, 4 of them are doing it. And some, for example, silver ETF, when they wanted to launch, a lot of issues were there. So we engaged with SEBI and have got some of the concessions made. Where the schemes are also, if they choose to participate, they should be able to participate on the MCX platform. That's the way we wanted the regulatory framework to be structured. Now still some issues are left open. Let us say, the standard silver contract size is 30 kgs. Now they say that you should take the whole 30 kgs. But then nowhere in the world that delivery comes in 30 kgs exactly. It could be a [indiscernible] of 2.5% under 1 kg [indiscernible]. That's how it is. So again, we are telling them, please don't hard put in 30 kgs. But you provide first some exports, some kind of leeway. As long as they take the delivery from the exchange, they want to take delivery, that's fine. Whatever exchange gives it, you say it is fine. Or if they just don't want to take even fiscal debt because they need to keep it somewhere and there's a cost of storing it, just -- simply just buy a contract and then the exposure stay -- take exposure. That's good enough for them, and they can benefit from the price difference as they keep growing more. So some are doing it already. Some are still to do it. I think the new exchange launched recently. Somebody said that. And there's a provision for hedging it on the exchange platform also. So again, even if you see the mutual funds, almost 90% of them are focused on these very few other equity debt funds, but nothing to do with commodities so much. Gold ETFs are there, but that is -- again, they have to correct the scheme. If the new scheme comes, then they can always say that we can also take exposure in the commodities. This is one part of it, the industry problems I am addressing them. So in order to address all of these problems and then get them on our own, we have requested the AMFI to [ polish ] this committee. I think that's likely to happen in the coming weeks. So coming back to the other distribution part of it. Again, we are bank broking houses is what we have been talking. Again, the growth is slow, not that I'm happy about it. But I can only do so much because it involves cost for them to develop a back-office software and then launch a full list of commodities. So again, they are also -- they ask me that, look, my clients are not asking for commodities. So why do I do this, okay? I think it's a fair point, what they are saying. Now again, if the client is not asking, fine. But how much can I ask investors to go for it? Because there is GST, any commodity that they take, if they're -- unlike in the equities, if they get into demat account, does that mean it goes on? No, no, no. Here, you need to give that credit back to the one who is selling it or...

How does that work? Can you give us an example of if somebody is -- if a futures commodity is buying from a bank at low rates, how does GST work in that?

No. No. When they are buying it, they take the delivery of the commodity, assuming it. So they have to pay the GST, okay? When they sell it, okay, they could get back the credit, okay? So -- but they won't get it out of their register. All of these people who service trading commodities must -- if they focus on taking delivery of any product, they must register in all states where we have the warehouses. That is the business rule at this point now because this rule will be [indiscernible], I think.

[indiscernible] can exist intraday trading [indiscernible] there is no issue.

That is the speculation.

[indiscernible] equals [indiscernible] delivery. Then we have GST issues.

And the solution for that is the regulation has to change.

We have been breaking our head with the government. We have been asking them to change this. We have been -- and we have made a lot of representations to the government also. And the -- we have also set the revenue from the proposition that we have given, simply convert them into IGST. So if it is IGST, then they need to register at least in one state. In the case of current regulations, where are the warehouses located, you should have a registration in that state, notwithstanding your position says something else, okay? Now this is one part of it, the GST issue. So coming back to the bank, so they couldn't offer, and I don't advise also to offer, to all equity investors without fully understanding the nuances of the business. If they are buying and selling and getting a total, no problem. But if anybody is stuck, it will be a very bad day for them. And I don't want that to happen, and then bad experiences should not be spread. I mean, I don't want anybody to have a bad experience so that it would not spread. So that's why we are looking at it carefully. But what we have been telling them and then I do not know the -- how much it is happening, at the bank, a lot of customer base who are corporates, they must be having some exposure to some of these -- the commodities. Why don't you bring them onboard? They should fully understand. And if you tell them, they will do it because you are a lender. Maybe there's -- some relationship is there, okay? That is where we are telling, they're not our head concern. But then at some point in time, they said that the Chinese [indiscernible], the Indian one, whatever it was, they've been [indiscernible] and all that kind of thing. And then they say that it's not happening as much as we expect it to. So that's the response we get. I think that is something which we should be constantly at it. While on this topic, I'll take one step back to the education. We have gone through the banker training colleges. Some of these banks have got their staff colleges, 2, 3 have come down together. So even in that, we wanted them to make it a part of curriculum, okay, so that they understand hedging bankers themselves. When they are extending loan, they can also tell them this is the way you can mitigate the risk. And that is something which -- I don't know how many programs you have done...

We have a separate -- apart from that bankers college, we -- in fact, we currently approach the bank's people. Banks also, they have -- they come together from all the relevant people, then they have their own competitors.

Okay. So trying to see -- we don't know which one will click, and then that's the way we are looking at it. But so at various levels, education is happening. So this is another part of it. And so the banks, we have been telling their corporate should be addressed, and I think we will pursue this aggressively as we go along this one route, a very important one. Probably, we will take the 3 major bankers, ICICI and...

And [indiscernible] the hedge [indiscernible] without any [indiscernible]. In fact, we've made a request to them also like -- because every year, you will be having new employees. They will keep coming. So if certainly you are doing any investment program or something in the beginning of the year like because you would be doing something, so we'll be happy to come there and we can give some suggestions so that all the new index also will be knowing their own margin [indiscernible].

Okay.

So I mean, your largest shareholder is a top bank. Curious to hear like -- and we also have representatives on the Board.

Yes. But Kotak Securities is one of the -- ICICI and them, they're the 2 major players on the exchange. In a sense, they're supporting the exchange. But again, I don't peek into beyond the Kotak Securities. It doesn't -- we do not need to get into that. I can only tell them 10x or 100x, please ask your parent to share with you the corporate client accounts and then deal with them. So...

Second question is, you have already talked about this. But let's say you are able to see indexations, charge account indexations. And some of these are auditors of these SMEs and MSMEs. Would that be helpful?

Absolutely. We have done it. We have done this one. The response is good. The response is good. But the problem is, I mean, just maybe last week, in Cochin, we had a program, and our Head of Energy went there. We all like this program. And in the meetings, they're all CFOs, some are [indiscernible]. All managements are resistant to -- are showing resistance. We understand this is what needs to be done, but management are not interested. And we tell them in many people, hedging is not speculation, but not hedging is speculation. That is very clear, okay, because they got used to that kind of extra part by not hedging and speculating on the market. But if -- I mean, that is the way they have brought up maybe for generations. It will take time for -- some more time to -- for them to change. This is one aspect of it. Coming back to the products, yes, we are looking at it. The futures is one. We hope that it will be resolved at the earliest. This is what our route has been, and it is delayed almost on a year or so, more than a year or so. And hopefully, we'll get this resolved at the earliest. Now this is one part of it, and aluminum alloy is another one and steel, TMT parts. And these are the contracts which we are looking at. And we are also looking at what we call gold options.

Gold options?

Gold options are for monthly -- optionally bimonthly contacts. Currently, we have a bimonthly options contract. So the tenure is long. So if it is monthly, the -- this one will come down, premium will come down is what I'm asking. Of course, we have a mini contract, gold mini options, doing well in comparison to what the turnover in the underlying futures is. So that is the way it is. But we expect -- like there's a value for your energy contracts, we expect this one also for gold. So in the product segment-wise, we expect a much bigger growth in the options in the next 6 to 7 years than in the underlying futures. We just have to be wider in whatever [ we offer ], whether the options are getting converted into the futures. But all options don't get converted. Many gets closed. So whatever the results remaining, that will get converted into futures or open positions. I hope I addressed anything [indiscernible].

One follow-up question I had was purely by regulations, corporates have to hedge gold exposure domestically, right, which must have benefited the exchange, right? Can you help us understand the extent of that benefit? And also, if you think similar favorable changes can be brought about for other commodities?

Coming to the first question, yes, we have immensely benefited because of that. The minute we topped that, they are already a benefit, okay? On the exchange, we are hedging that. So whether we've benefited, yes, it has benefited. Whether we can have a similar replication in other industries, it is doubtful because it is the RBI which has done it. And 2, 3 times, we have written to them requesting that this particular warning must be done. And so that the domestic players will hedge in the domestic market or other products. It didn't work so far. So that's where our...

What is the risks from other commodities?

The cost of trading in India is high. Let's accept that, okay? And the regulations and rules are not conducive for one to get a line of credit and not to deal with the what we call day-to-day pay in and pay out, et cetera. And that is something which we need to address it. Currently, you have a CTT, which you don't find elsewhere. And the lines of creditors, currently, there's no brokers. They used to -- I mean, they're in overseas markets, but that's not the case here.

But you're not optimistic on that sort of changing over the next few years?

Well, while we make an attempt to change that, but what I can't change is, I will accept it to be as it is and then double up our strength to pursue in other areas where we can make an impact. So that is where we are trying to reach out to. And one of the activities that we are doing, again, to bring the industry center for our business, okay? We are equipping their -- we are empowering them to deliver on the exchange platform. So gold, 3 or 4 of them have been implanted there, including Titan. And similarly for -- similarly, the net -- 2 of them have been done, and another 2 have been improved. And then they will also be able to put their -- pass, I mean, ingots on our platform. So that gives visibility not only to industry, to the people who are getting admitted in the panel, but also to overall platform. And the word will spread around. That's the way we are at it.

Actually, I have one question on the future growth projections. While your business is largely technology business and you need to invest proportionately for growth, how do you think about your view of 3, 5 years out, what we need to plan for from a growth perspective? What is the right view on growth for the exchange? Because these are digital options. But how do you plan for the growth? How do you look at your inputs in the area of capacity, people capacity to address the growth that you think is the right for the -- because clearly, nobody can credit. But 3, 5, years, you may have some targets internally that you guys think about and basically plan the manpower, plan the technology. How do you think about that?

Look, the technology is basically we are what we call a technology-driven company, okay? Our backbone is technology. Now the planning vis-à-vis the volumes, we accordingly plan it. That is as far as technology is concerned. So that's not an issue.

Is it like potentially overplanned, except for the 3 years, 5 years?

No. No, we've -- I mean, that -- these certain things, I will not be able to discuss honestly because that is -- we never do that. But all that I can say is there is a SEBI regulation with sales. You should always -- it should be 2x the highest volume that you are at. So that is always there for me. So that headroom, having got that 2x headroom, I don't need to worry if there is any intermediate [ search ]. That is one part of it. The second part of it is the -- our protocol, it's not proportionately related -- our expenses are not proportionately related to the growth on the stock plan because especially the people and other things, whosoever are there, they are there. Just because volumes are going up, I may not recruit more people, okay? But if I venture into new areas of business, that's where we plan and then get into it. Now that is where the -- some of these spot exchanges makes the difference for us, we are looking forward.

Got it. And could you remind us, Mr. Reddy, what are the spot exchanges? I think there is a gold spot exchange, gold...

Gold is one. But coal is another one, which we are actively working on it. Not got the Board's support, but then we are there. And in a sense, we are very actively considering these spot exchanges.

And do you have a sense of how large the addressable market is for the gold and coal spot exchange?

Well, in the case of gold being a spot exchange, and currently, there is a tough deficit in the physical market, probably those who want to take physical gold delivery, they will come to this platform and then take it. That's the way it is. So -- but it is equally important to understand how far -- unlike -- I mean, it's in a demat form. So that's one beauty of it, okay, the gold EDRs or the [indiscernible] depositories which it has generated. So they keep accumulating. They don't need to worry. On a day-to-day basis, they don't need to take physical delivery and then keep it in any vault or anything. But whenever they want to take delivery, we must facilitate that many centers for that kind of -- we should facilitate so much. Having said this, in the existing framework also, we have issued a circular to member brokers and clients telling that we are vault managers. I mean, vaults are there. They've agreed to do about whole dose of delivery of gold. So even if it is a futures contract, if 1 month down the line you want to take delivery, then you can buy a contract and the take delivery. And you are guaranteed of pure quality, there's no doubt about it. So this is also -- it's a multipronged approach here also in the sense of this instrument of this facilitation. Yes, it's easy to attract retail investors into this because this is -- to MCX, gold is their darling of the market. And many households also, they get attracted. Number two, they will be [indiscernible] to MCX for a longer time because they know what is needed. And whenever they want to pick up gold, then they want to be safe. Sure. Member brokers who are currently not doing it, at least they will start through their equity investors selling gold coins, gold -- some gold products. Now the third and the fourth one, even the silver is another one which is attracting it also, okay? In silver also, we can deliver it in -- we have not launched it, the delivery team. But silver also, we have asked a few vendors to have -- give us multiple delivery centers. But this is seeing some traction. We find that a number of brokers are interested now, who were not earlier opening the terminals also in the [indiscernible] license. Now they say that, yes, you spread this work to your customers to take them from MCX. I think that is something which brings in a greater degree of costs among the investors. And it will be in demat until they take delivery. And now they choose to take delivery, they can simply...

Do you have a sense of -- I know this is all crystal ball gazing at this stage. But do you have a sense of the revenue potential of the gold spot exchange versus silver spot exchange?

Gold spot exchange, we have projections, and I talked about it. We have taken a very, what we call, a conservative approach on this. We wanted to do it as a segment of the exchange, but we don't have a technical platform at this point in time. we are doing it through TCS. TCS is once they deliver the gold, that gold is picked up, and then we do the picking and then we deliver this one. But again, there is -- GST show there. That is the reason why people have not launched this one. Otherwise, BSE also launched last year sales estimates. One more shipped [indiscernible], and then nothing has happened. So that is the way it is at this point in time. So...

But can it be comparable to the size of your base business?

It will not [ just close ]. It's not speculative. It will not [ just close ]. The only thing -- advantage for those people who trade the spot exchange with us than in any of those exchanges, we have the futures and the margins which they can be given. And there is no interoperability at this point in time. Yes?

Mr. Reddy, the list of clients, trading members that we have, you talked about [indiscernible] about 55%, 56% of the overall volumes being traded at our exchange. From a profitability perspective, is there a difference in profitability across these players and the way you look at from a long-term perspective? And secondly, when you look at -- with futures and options more importantly, do you see there's a meaningful difference in profitability and margin? Is it very similar in your view when you try to look at -- it's tough to look at the fixed cost between futures and options. But whichever way you look at the business, is there a difference in margins across these 2 products?

I see -- for me, it is just clean lineup for what I call the product creation, and then we leave it to the market to credit. Now if there's any incremental costs associated with both of them, I can understand there will be somewhat a profit margin. But it doesn't matter.

There's no extra sales effort?

Absolutely nothing, nothing extra. Nothing extra. I don't want to increase my core business development team. There's no increase in the product management team, nowhere. And our numbers remain flat, about 350, 360, whatever is the HR list. Nothing has gone up. It is just that the peak margin in crude oil, driven away the people from the futures contract to the options contract. And then they found [ favor ] these days. And they -- many of them are paying in equities anyway. Now they've got the lengthy [ route ]. Then...

Starting what we have done is the moment we found the opportunity in the options, when we started letting the transaction [indiscernible] at the right side, that can -- we help substantially scale up the awareness programs in options. That means because what we expense so far, they have been trading in futures. We want technically to push that education among the customers and traders so that they can also start looking at options as an equal way. That's why we [indiscernible].

And we keep asking the brokers and the money customers, please talk about commodities also and about equities. Please talk about options in addition to the futures. All these kind of things does help. You listen 10 days and then the 11th day, you will start trading.

Is there any -- sorry, I saw one -- I mean, we spoke about the time that the technology platform in TCS has been delayed by maybe a month or 2 months. And I saw that there was a press article that SEBI has asked you some questions or given you some advice. I just wanted to understand that a little bit better.

See, in fact, everybody knows in 2020 that we have entered into a contract with TCS. And that 63-months contract is coming to an end in September '22, okay? So as per the agreement, we could not have released the RFP earlier than October '20. So we released it and then signed it in January or February with TCS. So we had only so much window for development. So we want to go live sometime in July, as we thought we would as originally planned. That's got delayed. Now the deliveries are yet to come. Some deliveries are yet to come, and they are coming. But there's a but. We have launched the [indiscernible] also for some of the modules that have already [indiscernible]. And then there will -- from now, we wanted to start a full pledge with [indiscernible] also. So we are expecting to be there in the next 1 or 2 months' time. We complete [indiscernible] and all sorts. So thereafter, we will be -- will give the requirement of -- I mean, when we can go live, depending on the number of bugs that will come and how costly it will fix it, et cetera. But yes, there is a concern out here. But we have informed SEBI also. Again, we have close to 63 months also for giving us some extension. So the discussions are on. And we have also plan B, plan C. And in the call also, I've been mentioning it also. So alternative plans also, we are having. But I must say, the last 3 years, ever since I joined, I've never seen the system going down even once, okay? There may be some problems, some broker is not able to upload some file and all that, and some maybe workaround maybe there to fix those problems. But I'm never seen the system going down. And we have got our perpetual licenses. We have paid for everything. So we can use it. The only question is in the event of not being able to support signal, the event of the signal is not supporting that you go as solo, where we do face any risk, so we need to take some risk mitigation measures. Don't really make any releases in terms of fixes, a batch of [indiscernible] and other things and don't do any developments, further developments. All that can -- obviously, we can't do that. So run the system as is [indiscernible] basis. That's the way it is. We have to -- maybe some vendor gives some support, we will go for that.

One last question on my side. When this implementation of the software is in the works, do you expect the dividend payout ratio to further increase over time because I think we had, of course, a lot of cash for us...

Well, dividend payout ratio is flowing from the policy. Earlier, we had a 90% dividend payout ratio to be given, and it was reduced to 75%. So if policy changed it to 90%, then we will -- whatever it is we earn, then we will pay off 90%. So it is more to do with the policy than CapEx.

The policy is recommended by the Board.

By the Board, yes. So sometime last year or the year before, it was...

Year before that.

Year before last year, it was reduced to 75%.

I'm assuming it was done with the intention of -- you knew that and the Board knew that the 63-months contract will come up for renewal, and it's probably better use of capital to buy the technology. It also derisks the business and so on.

No, we may not buy it. Basically, we will not be able to do that, okay? But we will need to seek some extension of their services.

No, sir. My point was that it seems like the Board reduced the payout ratio because you anticipated a large technology purchase.

You mean to say at that time -- at that point in time, the RFP was...

So now that the -- I mean, hopefully that...

There is already PCs getting fixed. Yes. So we can look at it. We will -- we may -- we will look at it.

I mean, sir, as investors, one key thing we look for is capital efficiency, and I was talking to Satyajeet about that as well. We understand why the exchange kept the amount of free cash on the balance sheet as we have in the past. Now that very soon the purchase will be behind us, then if you look at other exchanges globally, they pay out close to 90% of their retained earnings of the year. I think if the MCX were to consider that, I think it will be looked at favorably by shareholders.

Sure. Sure.

That's just one request we'll make.

No. We take your feedback. And in fact, you're a valued customer or a valued shareholders for me. And I've been seeing your name for the last 2 years, I should say. And as staying investor, we will definitely consider what our size is for dividend.

Okay. Sir, thank you a lot.

Well done.