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

So I think you've been monitoring. So any profit would analyst would be on the last. So now it is like a gap maybe after some time we are looking at 8 months.

So just to give you some backlog, Ben who's from our investment. He's come on. He's meeting a bunch of companies. And as far as that, we come down to me.

So like we have to start from being our I think since already you know it?

Yes, there is some background on it and generally, in terms of the fund back down as well, we have about $30 billion in AUM, emerging market and international strategy. And typically, they invest from a 7 to 10-year kind of times of thing. We were saying the long-term invest. So then we classify that from a 7 to 10 year.

Yes, I think it would be helpful if we just get into Q&A, maybe the first one on just maybe discuss about the ownership transitions. I know you guys were listed in 2012, maybe the ownership transition since then what changed Yes, just a bit for background.

So transition per se, happened a very long time back. Now it is basically -- now it is totally in what you can say is independent. The board is totally independent, and we have some PIDs dominating at CID. And then I think 50% is generally some of shareholding directors that we have in DC and another 50% is around a public independent director. So It is like they have to approve the appointment of public and restarts, okay? So while we can recommend some people. But ultimately, it is a regulator who will decide like with that. They would like to appoint whatever on as a Director of. So recently, the Chairman also has been approved by our regulator. So it is totally like while 15% still is with Vortex. Vortex is the major leading shareholder. Otherwise, it is broadly shareholding is widely distributed among institution, bank then you have other market participants.

And how involved is Vortex in the business?

[indiscernible].

And just curious on the market, the industry as a whole. What percentage is it -- what percentage is exchange traded versus OTC or everything is just on the exchange?

Currently in India on the exchanges, CB-regulated exchanges, only exchange-rated products are traded, not the OTC. So unlike if you take any global exchanges where you find OTC products are also getting traded and is cleared by the clearing cases. But in India, the products are traded by the seton the exchange platform and getting cleared by the subsidiaries, clearing corporation subsidiaries. So there are no OTC products that are catered on the exchanges And just to say that there's no OTC products also on the market.

Yes. But if you -- if you limit yourself to commodities, then I think very limited, at least maybe one-to-one tailor-made will be happening, but at least it is not getting traded on any particular platform per se that kind of platforms around the OTC trade platform.

And just curious like how much are these one-to-one have direct OTC trades if I were to classify that we know how much kind of annual values to trade?

You are seeing size of the OTC?

Yes.

So size is very difficult to say because it is not traded any exchange. So we don't have the numbers. But some of the recent developments happen to be like the RB, our Central Bank said that the gold who over wanted to hedge, they cannot go areas and do it. They have to trade in I think they can hedge only in the domestication in case of gold. In case of other products, CB has come out with some regulations, they have amended it to are they are supposed to make -- listed companies are supposed to make certain disclosures with respect to the commodity price risk Okay.

So given the commodity, what kind of exposure they have, are they hedging? Or how are they trying to protect themselves against the price movements in the commodities?

So these are part of ODR. The list of companies are supposed to make disclosures to the market. It's just to create more awareness to the shareholders as well as to the company, how sensitive they have to be there towards the commodity prices. But unlike the gold, there is no mandatory thing that says that we are to necessarily have to trade on domestication. So many of the Indian companies like Metals and other people, the main players, bigger ones, the do hedge in international markets. But when it comes to small and medium players, marginal dealers or if you see the rest of the value chain participants, they come and trade on the domestic exchanges, because for them, trading on an international platform is very difficult. Once the size of the contracts are very big. If you take even the London Metal Exchange, the size of the copper contract is, say, 25 metric tons, aluminum again 25 metric tons. Where in the Indian market, it is a size is pretty low. In aluminum, we have about a 5-metric-ton contract, then gene lacing 5 metric ton, copper, we have 2.5 metric ton contracts. So lately, they are smaller. Okay. And somebody can without necessarily getting into the exchange rate of this and all those things, they can easily take enable hedge in a domestic market.

And what percentage of revenue the contributions from these small, medium size stays business at large?

See, generally, the trend, this is going to be the general trend across the world is it is the traders and other people who trade on a wide scale basis compared to the real hedges because hedges take a position and carry on that position for a longer period of time. But when it comes to the algo players or some people to speculators, the time they take the origin for the period for which they want to speculate is going to be smaller. So they very often enter it and other things. So if you look at the volume quarter, roughly around 40 to 50 percentage from the Algo trading, okay. The rest of them are high. But when it comes to the open interest, open interest, you can see that 20% to 30% now, as you can see that it is going to be contributed by the hedges, okay? So there are in some commodities, the hedges contribution is more than 50% significant.

Sorry, Ajay. You mentioned from following perspective, 40%, 15% retreading annual remaining is hedges?

No, no, it's not see. We don't have the complete pipe who are the contributor. So roughly, I'll give you the picture, like the way we give the breakup is even if you look at our investor presentation, we give us how much the cliental participation of the pro. This is one category. Rather is algo and non-algo, okay? And just like I said, their contribution won't be significant. It is like the trading volume-wise, a contribution won't be significant. But as a percentage to the open interest, their contribution is significant because of the nature of trading because they want to take position to hold return for a longer period of time. That is how they want to hedge their position.

And in terms of your customer profile, like SMEs kind of SME smaller companies or smaller participants, so they make up most of the revenues of the company. Of course you say the larger guys, it would just go directly to the trade market.

Unless see a speculator will not be able to go on trade market because our regulations won't easier, for example, I cannot go and trade in an Internet market because I can only permitted to invest, but I will not be able to trade in derivatives product. So that way for the Indian market participants, it is ostic market, that is a venue where they can be able to whatever kind of trade they would like to do, they can able to do that at only select people who have the access to the international markets, the only they would like to go on trade in the international market. So I think even if it's a metal when I'm talking the hedges who are trading in this market. There are very limited participants who are trading and trading in the ostic market because in all these markets, it is nominated by only 4 or 5 people not many, okay? So at most these players, they have access to the international market. Otherwise, rest of them are all they look at Indian markets to trade.

Right. So say, the top 50, top 100 companies in India?

We don't have that many at least the bigger ones, bigger ones happened, we won't be some temper at least in some other if you take some metals, even we won't find that many producers and this very limited players. The rest of them are part of the value chain, and we generally put all their trade to trade in Indian marketing.

And just in terms of the revenue model, I saw on the from transaction fees curious about 70% exactly. So I'm just curious, like what is the other portion, the other 30%?

So we'll have one is a membership fee that we collect from member. And there's also data -- trading data that we get to institutions like in a and connectivity charges that we take out from our numbers. And we also have sitting on net worth of INR 900 crores, that is invested in the tech market Right.

And just maybe could you run through how much that component is as a percentage of revenue? And maybe just what's the model around there? Like is it fixed or is it variable?

So we start on members to INR 260 crores up to up to INR 350 crores turnover we charge 260.

It is like a lab slabs if you fall on a higher category P&L like you will be paying that. But it is like a incremental basis, like income tax up to this level, you pay a higher amount. But after that one, you will be playing in the amount. So it is up to INR 350 crores on a daily basis the number process INR 350 crores, then the transaction fee will come down to uncertified per crore. That is our future. We have a similar transaction fee structure in case of options also. But options are premium, not on the turnover. So there, it is like INR 40 to INR 50 per lack of premium traded on the exchange single-side.

Sorry, can you repeat the number again?

INR 40 to INR 50 lakh of premium turnover.

Okay. And this is the transaction that you charge. How about the membership?

We just see there's a subscription of INR 25,000 per then is someone wants to comment on the new number 7.5 lakhs as we mentioned.

And how about the trading data?

At that very the bank I don't have the figures with me right on front.

In terms of growth, are these areas, especially the data?

Data periods picking up.

How far does it grow that?

And this year has been a good year for the related business compared to other years.

Then as a percentage of revenues, how much does it represent? I'm just wondering on the annual value traded by segment, I think you have performing classifications of the segments. How fast have they been growing over the past, say, like 5 years just in terms of the average daily trade volume for this?

What happen means segment-wise, it depends upon year-to-year depending upon where the volatility you would be able to see in commodity. So 1 year, we would be able to see the volumes, good volume witness in one segment a metal later on in than in the energy products. So primarily, it is a volatility which we termed that which segment really will do good in a particular year. And we have a diversified basket. We have metals and linen agri. So typically, what we have seen is, whenever one market is the cycle because it depends upon our commodity cycles. When our one commodity cycle is on the peak, other will be in not like when billion commodities are doing good, you will not find the metals doing that brick otherwise energy is doing so. Typically, it is like the volume spreads from one to other. So there is no trend that really you can be able to make out that, okay, this is a segment which is what is going. But what you could be able to see the trend is now towards the auction compared to the future. We could see that there has been a slight drop in the volumes subsequent to the inversion of the peak margin reporting system in India, a concept called Peak Margin Reporting System has been introduced.

Peak Margin Reporting System?

Peak Margin Reporting. So essentially, the regulator has introduced this one to ensure that sufficient margins, upfront margins are collected by the members from the clients. Earlier, some members use it to give some leverage to their clients in trade. So in order to restrict the numbers to get into that kind of providing leverage to the client, this kind of system has been introduced. So the member, if at all, they are not able to show that they will look at what is the peak margin during a particular time and during a particular day. And they will see that whether the margins of the client is sufficient to meet these fertile peak mergers from that. If there is a shortage, it means that sufficient margins are not collected by the member from that client. Then there is a penalty clause be triggered. So after that one, what we could see that one is there has been a relative drop that happened in case of futures turnover, okay? And the trend, there is a substantial increase that we would be able to see in case of options. Okay? So for a long time, we could not that kind of attraction. So -- but for the past 2 years, options is phenomenally doing well. And we started introducing the transaction fee only last year, last October. Given the trend, what we could be able to see earlier, we were not charging any fee for options.

How do you expect this segment to be and how material will it be to revenue over the longer period?

So in India, what we could see is options are playing a very bigger compared to the future. If you look in equity market also like 80% around 5% to 80% is from index options compared to futures. But our products can be related can be compared with the single stock futures and option because the index but say we do have 1 or 2 indies. But it is still not reached to that and what someone can see in the equity markets. But options in Indian market, always, we see that market is now very much familiar with the options for Indian market. And unlike in the equity in international market, in the international market, you see that roughly the options is about 20% of the futures market. But in Indian market, it is also the different. You could see today, like I'll give you the yesterday number. It is like yesterday we had done some close to INR 71,000 crores in actions compared to 28,000 in future. So trend may not be like, but what I mean to say is there is -- even if we can grow multifold of different futures, that is very much possible in Indian market conditions because options have been well-received product by the Indian market participants. But we have to see that how the growth.

Globally is 80/20 and India is like 30/70?

Globally, it is 20% is options more futures, like future is 100. 20% is INR 10 45, 25, yes. So here it is altogether different. You can see that a few options happened to be even higher than -- but that is a particular date. But at an average, also if you can see recent trends like the auctions are higher than the futures turnover, around 30, 26 lakh that I've said.

And options are more profitable for us per se?

I think currently, I think last quarter, we have done some -- we got a revenue of close to 60 from futures and 40 from options. That is how we got stores. But if you see the same amount of turnover happens in the auctions, can I get the same amount of revenue from auctions compared to the future means Definitely, I get less lesser revenue in auctions if the turnover happens to be the same. So initially, we were expecting like it could be roughly 33% of the auction. That means if you do INR 3,000 crores of options turnover, you can -- that can be comparable with that of INR 1,000 crore of futures turnover, revenue realization-wise. Premium not on that one. But what we could see is we are getting better than what we have expected. I think going by that rate, roughly around auctions and futures turnout happen to be around same thing. We could realize INR 40 crore, INR 60 crores versus INR 40 crores in option. That's a pretty good realization rate because people tend to trade in more the money in the money. It depends upon where the people would like to trade, but people tend to trade towards that kind of contract that has given us better realization rate.  But an advantage, what we could see in our cases, the margins are pretty high in futures market currently, especially in crude oil. Roughly, I can say that it is about 30% happened to be the margins, okay? And we also have a pre-expiry margin system. That is 5% incremental margin will be charged towards the expiry. So give it is like during the last 5 days. So first that in the first today, you will be charged 5% more the next 10% more than 15 the [ liat ] incrementally and our additional margins will see a per merchants will be live or the parity. So that puts the margin quite high in crude oil. It's close to sometime it goes to close to 55%, which is substantially high. So that is why they find the market find the options as a very good product. So one is higher margin. Algos won't find it, the margins -- higher margins is challenged.  But retail and other people, they feel they want stability in the margins rather than what do you say, higher or lower. So in the Indian market since market operates still level 3, there is a possibility that algos margins drastically can get changed depending upon the volatile situations in the interventional market. So some of the retailers who prefer to have stable margins and other things, they prefer to trading options because they can buy the option and they pay only the onetime premium. They do not have to get into the margins, okay? Only the writer has to -- suppose it to got the margins regarding to the situation that when depending on the volatile situation in the market. So we've seen many -- some of the buyers who otherwise earlier used to trade in the future. Some people prefer to trade in auctions now. So that way like we could see new market entrants as well as the people who thought the margins happen to be on the higher side in commodity market that prefer to operate in the commodities.

On the gas, you mentioned how much contribution -- sorry, the first half of this year, how much was the auctions contribution?

We are seeing a friend actually a port pentile he will give you the numbers, but what we could be able to see is the growth of auctions happen, we are scaling up. So I think in the first quarter, it is slightly less.

Yes. For this INR 27 crores in the second quarter comparative figures for Q2 was 66% in the first quarter and 64%.

And just curiosity, how big do you think this options opportunity will be like?

See, we wanted to capitalize on this, whatever growth that we could be able to see in auctions, and we wanted to come out with more products on auction segment. So currently, one challenge that we could see in bullion product is some of the commodity contracts are bi-monthly contracts, like gold, our KG contract, it is a bi-monthly contract. Similarly, our silver contracts, again, they are also bi-monthly contracts. That means you don't have a contract every month, you have a contract, the alternative market. So in auctions, higher the duration, then it is like the premium will go up. So the trend that we could be able to see is when auctions are coming closer to the spec, we could see a greater volume compared to the periods when the expiries. So we plan to come out with monthly contracts. Underlying maybe happen to be the same, like we don't want to come out with a monthly futures contract.  While we wanted to come out with a monthly contract to introduce monthly contract in between, so there could be 2 contracts on the same underlying a futures contract because in India, our contracts are all auction on future contracted. It's not auction on cash. So basically, these auction contracts on expiry that devolve into the underlying futures contract. So what we plan to do is we wanted to come out with the monthly contracts not only in gold, we also plan to come out with in silver and silver also happened to go by one. So we want to that also we wanted to come out. Besides that, we are also looking at introducing shorter duration contracts in index and other products. So basically, we wanted to tap whatever is the potential that we could see in auctions growth.

How about in other products aside from commodities. Is there an opportunity there?

See, currently, what we want to is our focus is on our technology platform because now we are starting to migrate from existing technology platform, which has been provided by 63 Moons to TCS platform. So that transition is happening right now. So our primary focus is on that one. But once we migrate to the new trading platform, we wanted to float all segments and all the electricity, and that is commodity. Besides commodity, you are asking other asset classes and other things. Maybe we can look at currency and another thing, but it is too early for us to say anything on that one because our focus primarily is on development of our commodities market and maybe, if at all, any linkage as we find in case of spot market, physical spot markets, then I think we wanted to get into this kind of contact like we are looking at coal spot exchange. Then CV also has come out with the electronic gold receipts market, but there are certain challenges, but I think, yes, we are looking at all these opportunities.

When will this transition happen to the TCS platform?

We already started Mark. Shortly, we will be planning -- we'll be coming out with the panel the 1 month, but our goal is by end of December, we wanted to migrate.

And just in terms of your goal, long term, very long-term goal, is it just to be a domestic specialist to compete in the weeks?

Currently, we are not -- that came to go over this because we see a lot of potential sale is untapped within the domestic market. So recently, one of the recent development happens to be like foreign portfolio investors have been allowed into domestic commodities market. So currently, we allowed them in capital commodity market. It's a very recent development. So we will -- once this transition happens, we will -- we take it of that one also like because we see the potential there as well.

And I think just curious like I look at the annual report, I see many partnerships in asset licenses. How important is that to running the business?

Today some of them are just knowledge sharing agreements, okay? Like it's more of MOUs kind of thing. But with CME, we have a licensing agreement where we take their prices for settlement of our contracts, which happened to be crude oil. In other cases, we take their prices for settlements for us, and we pay some licensing fee to that.

And just curious from the basic trading cost will be the fees just how about implied trading costs. Just curious like how does that look like over time?

Trading costs?

I mean for a customer, for example, if I trade the implicit cost, it's the amount of CPU?

Implicit is quite high compared to any other market because we have something called commodities transaction tax, which is INR 10 per lot on the sell side. Then we have a stamp duty. Stamp duty is around INR 2 per lot on either side. And then we have GST, which is 18%. And what we collect is very much less. So whatever net that government resumes is significantly higher.

INR 10 per like is?

CTT. Region the sell side, commodities transaction rate.

And then INR 2?

INR 2 is stamp duty.

And how about in terms of like the indirect costs coming from lower liquidity?

The impact at some time, we have seen that we are lower comparatively even with the global exchanges, because our tick size is very less in case of gold, for example, our tick size is only INR 1 compared to the global market is on content per se. But when is converted, it is going to be lesser. So location, you will see in case of gold less than it ranges between INR 5 to INR 10 per ton gap for a price of around INR 500. It's pretty good. But as, if you look is a different thing, but because first 5 levels is very good.

So what do you mean by the level 5?

Price because you price debt, if you see it. Like how deep is the market is one in you can always look at it. But what I'm saying is when you look at the screen, first 5 ports you need be able to see it. So there, I'm saying these are very tight.

And just looking historically, I mean, the business looks great also market share. And just looking at the last 5 years in terms of revenue growth, not that much. So just curious what happened and what are the challenges to go?

So this 5 years, what I can say -- not the 5 year. In fact, 1920, we have done a very good volumes. It's -- during the COVID time is one thing that we had a setback and after that. So the one reason is it's not because of the COVID but it's mainly because of the crude oil, which went negative. So that led to a substantial increase in the margins that happened in the case of crude oil and also the peak margin reporting, which are being introduced. So the initial period, I think before what we could see the transition that some people started trading in auction. During this particular period, we had witnessed to some drop in or in future turnover. So one more aspect, I'll say, like what you can see is in 2019, the regulator have told us, you cannot have multiple variants in metals and other contracts. You cannot have multivariate. Earlier, we used them to have main and mini contracts in better. Like for the agri contract, we use to have a main and mini. We use it to have even crude oil, green and mania. They were all very good liquidity ran they could see a lot of liquidity. We could see a lot of liquidity in all these contracts. But regulator has said that you cannot have multiple variants. You can decide on the trading loss, but if you can't have multiple variants because the regulators felt that multiple products can lead to liquidity diversification because there is in order to have liquidity in one product. They wanted only one single product in a single commodity.  Also, what they said is your trading lot and delivery lot should be seen. So earlier what we used to have in some of the products, we used to have a higher delivery lot and lesser trading do. So people who have wanted to trade, they use it to trade whenever they wanted to go out of the market, they could be able to square up and do it without getting into sealer. But now because of that condition being late, like trading unit and delivery rate, we had to increase the trading lot of some products like copper, which earlier we used to have a one metric contract. And many of unicontract of -- I think 500 contract. That we have increasing to 2.5 metric tons. So there is a big jump that has happened in case of copper contract. Similarly, in case of nickel contract earlier, we used to have 250 kg and 100 kg contract in nickel. Now we had to come out with a 1.5 metric ton contract. This is a substantial increase in the size of the contract. That has also impacted the performance of these contracts.

Okay. And all this happened in 2019?

Yes, because the '19 in the sense foresee have shifted to cast the deal contract to the compulsory delivery contracts because earlier metal contracts are all linked to the London Metal Exchange, okay, similar to the type of agreement that we have with CME, we had called similar contract with seller to take their prices and use them for settlement purpose. But because of all these regulations because the regulator center, unless the delivery is not practically not possible, you cannot have a capsid contract to that necessitated terms now to convert all metal contracts into your delivery-based contract.

Contract size increase of the year. And so for the peak margin reporting when did that happen?

They are introduced in a phased manner. You can say that. In each quarter, they have started increasing it. At least 25% of the peak merger, then 50%, then 35% is at 100%. So now it is completely -- it is already 100% in now. So I think for the last, you can see last year, we can say that we are completely witnessed the impact of the peak on that reported already.

And maybe just moving on to capital allocation. Just wondering how you qualify your thoughts on capital allocation?

Yes. So dividend policy, we have said that we will see 75% of what we earn as dividend Okay. And once we complete our transition for this technology, and we will need some money because Sandias presently allowed co-locations in the equity market, not it comes for commodity market. So you need some money for setting up the colocation. And if we have to set up a subsidiary companies and to take care of the tenor of those companies. We need some cash to do that.

And how much cash would be needed for the colocation?

So we have not come out with the guideline. So that's the -- so we won't comment on that, but we are hopeful that they will come out with some regulation for commodity markets.

And how about M&A is that on the cards?

Early predict nothing, but yes, nothing unless you have something.

And is there room for people to acquire it?

There is a possibility. The line in India, where the market tees. So if anyone wants to acquire it, it would be for the commodity segment. So that is the value that we bring to them and the ecosystem of that. It's not easy to set up a company.

But is that a possibility real like the owners decide we coat we give up the 15%?

Regulatory wise, it is not that easy to it because you are there are certain rules and regulations on the share.

And just maybe could you just discuss about the key areas that give you up?

Other things could be like this is kind of unprecedented event anything can happen, even like crude oil, nickel margins went beyond 100%. So -- but we can have a long lasting impact because in our case, our city and guarantee fund is dependent on us test. And that is based on 15 years based on historical years historical prices. So even if some things don't happen sometimes, still it will continue to hold on.

How about any like regulatory risk flag on it?

There are regulatory risks because there are certain are reporting is something which have been introduced. Anything of that but I don't foresee right now anything because this sets comes a price or than 4.

For the quarter value, et cetera, side, regulatory wise it's largely done. Is that what you're saying?

Currently, whatever we don't see any -- what I'm telling if some flexibility is given, I think we can further look for more like mini contracts can come out in some of those.

You have to get approved before we launch any of that?

In terms of competition, we don't -- we are not that worried about income.

Because there has been from 2018 that the NSE.

Still, I mean, NSE got in 2018. We're doing the market making and they are not charging any transaction. So we are charging that charge.

Want to get your view on natural monopolies Okay, that's really most order to have it. Is it anything you're excited about or you don't want to share?

We have also, like I said, once we once we migrate to the new trading platform, I think we can look for more product and product variant innovation, all those things can be quite possible.

And just currently, like Saudi products in the equity space is they're all on energy options you just -- like most of the current contracts from futures options contracts for the equity market, are they being traded?

It is in ASCs dominated by equity E&O segment futures and options. The cash market also is very good because in our case, cash market is a different segment. Fis another segment and then the currency derivatives segment.

Who's the current leader in those segments?

In order to go into a new segment, you have to compete and rebuild everything.

On equity, I don't think it will make sense.

But we can see a in the long run, definitely, we have to look at it because there is a great synergy between these 2 markets, commodities and Mac.

Equity then we're spending good money in the long term.

Thank you. Thanks Okay. Thank you. Thanks for sharing.