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

Okay. Good morning or good afternoon, Mr. Aman and Mr. Nicolas. Welcome to this investor call. And please go ahead and fire all the questions that you have. And as much as share with us.

Thank you, Mr. Reddy. Thank you, Mr. Bolar. Thank you, Mr. Praveen for giving us the time. I'm very glad Mr. Reddy, we could speak to you this time. Last time, I think we missed the window opportunity to speak to you in the time frame post the analyst calls. But I think I want to -- I think enough has been discussed about the software in the analyst call yesterday. I want to first talk about the business and then maybe spend some time on this software per se. On the business side, how do you think about a few clarifies that I had. The UCCs has started becoming more flattish. The -- I think in the last 3 to 4 quarters, and I know that we had, at some point of time, discussed that not all users are active UCCs. So essentially, this number really doesn't matter. Active UCCs what is really driving the actual volumes. But if you look at last 4 to 5 quarters, the number is kind of more or less constant. I'm just wondering, should we read into this as active, nonactive UCCs and hence, there is no real change? Or is that the fact that the larger guys are becoming larger and larger from a concentration perspective and hence, a number of UCCs doesn't matter?

Okay. I think the way that we have been tracking, the UCC numbers are the ones who are actually trading on the exchange that matters to us, and that is what we are tracking. While this is scintillating at sometimes and maybe very stimulating. But once the equity markets even the growth is also less, here also will be less the ones which are getting uploaded. Simply that one single application and unified members, they are taking all the boxes, I can say that we are uploading in on MCX also. So that doesn't give us actually so much of revenues. But if you see actual number of UCCs that have traded, as I said, as against last year, 4 lakhs, the number we gave...

6.21.

Yes, we had UCCs about 6.21 lakhs traded as against last year's 4.71 lakhs, okay? So that's a good number, growth of 32%. That's what we have seen. And we would like this number to grow. But again, unlike in each of the side, I have already discussed it also, equity markets are primarily investment markets and this market partly investment, but more than that, it is a hedging market for -- I mean, for hedging tool opportunities is what it provides for. And this market also, unlike again, equities, you can have SIP kind of situation but we don't have here either you buy 1 lot. That's the way it is then now in between for us. So 1 lot means almost a few lakhs of rupees. That's the way. So coming back to that, to that extent, it limits the participation of the investors as wide as the retail that is happening in equity markets.

Got it. And Mr. Reddy, when you look at the top clients that we had -- top 10 client concentration used to go out close to 60%. Is it still a similar number? I think I did not see that number in the presentation.

Yes. I think in yesterday's call also, we said they account for 63%, top 10 clients account for. And FY '21, '22 is also 62.6%. Now it is just 63%.

Got it. And is this number very similar in options versus future? Or is it a lot more dominance comes in the side of options?

We don't have that kind of breakup price right now, but then I think we will get -- I can tell you.

Got it. Okay. Do you think Mr. Reddy from -- if you do a bit of blue sky thinking from here to, let's say, 5 years out, currently, our revenue mix, as Mr. Bolar pointed out yesterday, in options, which has become close to 50-50 in revenue terms. If you say, let's say, take this 5 years out, and I think you briefly mentioned on the call yesterday, evolution of equity markets and in that equities versus futures and options of equities. How do you think about evolution commodity markets? Do you think basis the work that you do on the ground with participants and your own assessment of the market, will India see a lot more of options? I mean, have you see towards options? Or will India be both markets? And the reason I say that is if you look at even NSC, I think options are a very large portion. Is that right, understanding right? Option a large portion of the equity market also. So how do you -- in your view 5 years out, how do you think about based on the responses you're getting on the ground, where do you think this will settle? Like from a mix perspective between futures and options, either in [ EBIT ] terms or in terms of revenue?

Okay. Let me first come to the participation side. A lot of retail investors and the member brokers also prefer -- I mean those who are entertaining retail participants, prefer options to features because -- in the case of options, when it comes -- if it is an option buyer, I mean, either the put or call option just there is the premium and then there's no more headache in terms of margins, et cetera, et cetera. But if it is the futures, and I think you have to mark to market and the margin has to be collected every time. I mean, 5 times in a day, even if the open interest is kept. I think many are distributed in that sense to move away from features to options. That's point number one. But at the same time, the option writers -- who are the option writers? We found most of them are the physical market players okay, that whoever stock with them kind of thing. So who have an exposure are -- I mean, if I have a gold worth maybe 1 ton or so, even if it is jewelry, et cetera, I can still be an option writer and then get premium. That's the way I look at it and there are a lot of premium in that sense. So they are not worried about that profit. So we've seen that kind of concentration happening. So more towards this, the number of writers are less, but they are willing to take this particular responsibility of option writing. And on the retail side, is the most of the buyers, I mean -- yes. Yes. So this is one part of it. So going by that, our options turnover will definitely increase. That's what my expectation given this kind of trend that is happening. While this trend is on, I also see options are going to contribute increasingly more to the exchange revenue. While the -- while more and more trading may take place a little away from the -- what we call at the money, if it is at the money, obviously, your premium will be higher and then you will get a higher income. But if we move away from that so to that extent, our option revenue, the realization may slightly come down. But definitely options are going to drive our business more than the features is why in my view. But at the same time, a new product introduction is also happening. I think they can contribute for futures to begin with, while the option volumes, so may increase on the products which have deepened in terms of features.

Got it. Mr. Reddy, if you look at -- again, it's hard to predict. But do you think from here on, is there any need to predict -- I mean, when you look at global markets, other countries and the depth of commodity market there, is there any way to benchmark, how deep, let's say, or how large the futures ADV should be in India or options ADV should be in India? Is this any kind of benchmarking you guys have done? Basically, let's say, GDP or basis, any the metric you think?

Generally, there are metrics which are generally used, but it is on the multiplier futures to physical market might be [indiscernible]. But again, the numbers are different for different commodities, depending upon volatility each of commodity. It is like, for example, in case of silver, which is more volatile as compare to the gold. So the multiplier is higher than the gold, that physical market to [indiscernible] . Alternatively, you can look at GDP, but it is difficult to say that how we can directly, we can correlate. But as a pie, it is increasing. Market as a pie to the GDP rate is definitely, it is increasing. With the options started doing more and more, I think definitely, as the percentage to the GDP which is definitely increasing.

Got it. Got it. I think from a realization perspective, Mr. Reddy, you talked about options realization may reduce slightly as we look at out of money options. I think the reserves talk about INR 2.10 per lakh as the realization from the future side. Can you just remind me what is the turnover -- I mean, effective realization from options? If you just...

For the quarter -- for the year, it was 41.66 -- 41.63 as compared to 42.84 last year.

41.63?

63.

This is -- so you think INR 41.63 per lakh?

Rupees per lakh on the premium. See, we have 2 slabs. One is a INR 50 per lakh and then INR 40. That is what so if it is coming much closer to this also, it also indicates that there is also a concentration major players are of trading. That's why they are able to get this INR 40 -- I mean.

So if you just -- how does this work? We are saying that let's say, if the ADV today is INR 675 crores, let's say, on INR 675 crores, I mean, I know that they are multiplier of 40% to 50% that we typically use to complete the effective ADV because the premium, we get a [indiscernible] on the premium, right? Yes.

We have 2 slabs up to what -- about INR 100 crores or how many -- 1 minute -- what are those 2 slabs?

Up to INR 5 crores, more that....

Okay. Up to INR 5 crores, it is INR 50. Above INR 5 crores, if a broker contributes more than INR 5 crores of premium and he gets up to INR 50. And if it is more than INR 5 crores then he will get a INR 40. It's like income tax slab [indiscernible]. Okay. So many of them are falling under the INR 40 slab.

Got it. Okay. Okay. Got it. Okay. Sorry, Nicolas, do you have any question on this specific area?

Maybe something to do with the participation. If you look at participation year-on-year, generally, we're seeing a higher contribution from algo-trading and possibly mobile trading, especially in options. So I was just wondering if there's any -- should we read in to this further, any implications from the higher portion of trading coming from those areas?

Sorry, sorry, I didn't get -- sorry. Could you please repeat?

So I think year-on-year, we're seeing higher participation from algo and mobile trading as a percent of volumes, especially looking at options, right? So I'm just wondering if there are any implications of this that we're looking to made for the downline or?

Mobile trading accounts for about 22% of the total trading. That's what it is. Proprietary client accounts for about 53% and proprietary is 46% and client is or 53% or 46.7% and 53.3%. And algo, non-algo 50-50 kind of... Have I made myself clear. Hello?

Yes. So I'm just wondering if there's any -- is it different economically to us if we have a higher portion of algo traders or mobile traders?

These numbers, I think we have given in our investor presentation also, wherein if you look at the quarter 4 '22, '23, like in futures, algo contributed about 50%. And in options, it is about 54%, okay? And compared to corresponding period, it was about 53% in futures and 48% in options.

Right. Yes.

Definitely, there has been an increase in the algo trading, both in -- especially in options.

In fact, as I think in one of the calls I've mentioned -- maybe one of the [indiscernible]. We are getting a lot of interest from some of the top algo players who are here to join. And I think they are all waiting for our platform to be ready, new platform and then to be launched. Some have already come through some of the member brokers and some are in the waiting. So obviously, algo trading will increase as we go along, no doubt about it. Now that FII participation permitted by SEBI. And I mean, I would say, to our pleasant surprise, FIIs have taken to the market -- to the commodities market as fish takes to the water. Unlike other institutional trades like mutual funds and others, who took a lot of time to come into the market and participate that's a good development for me in that sense.

Sorry. Mr. Reddy can you talk a bit more about deepening of the market in terms of the many contracts that you guys launched, how is that progressing? And I noticed you had mentioned that when the new software is ready, you will also launch options on shorter duration, which will probably deepen the options market also further, just sorry, this FII participation that you spoke, can you give some more color of how is that progressing? What are we doing to deepen the market so that the growth can continue for the next 3, 5 years.

Yes. See -- the -- a lot of interest, as I said earlier, maybe even starts to be the war situation and divide in the international community. I think some countries or some institutions which are based out of those countries that are keen to participate in Indian markets. So we have that kind of liquidity. Of course, it's progressing gradually but they should be happy to have this participation in this market. So that interest has come and we are seeing their inquiries coming closer and they will fructify our hope. Having said this, FII participation, our FPA participation has picked up, and it's a good number that we have got so far and it's increasing. I've seen almost all about INR 1,000 crores plus maybe coming by the FII participation. Then many registrations are happening. We are also planning to introduce category 2 and 3 gradually. I think depending on the system, fine-tuning that changes that are needed because for some category of investors, there is a limit as against the full limit that is available for FPAs. So that is one that those limits are put in place, we will permit more of them. One is this part of it, but then I'm more keen and keener rather on bringing more and more domestic players into this fold. I think our metal contracts, if you have noticed it, while volumes are low, but the open interest has been increasing. And that is a sign of degree of participation from the hedges. Now once that increases and as we are seeing it, I'm sure liquidity will also further increase. We have also introduced the mini contracts that also has seen some of the clients who earlier were participating, they have now come back. So that is another good development that has happened. And we have approached the SEBI also to permit us to introduce many contracts in copper and nickel. And if that also happens, probably we will be able to bring in more participants into this. But yes, it's a long way to go in terms of bringing a lot of interim, a lot of institutional participants and a lot of corporates to come into this fold. And hope we will able to achieve our objective as you said, in the long run. May be 5 years down the line, we should be able to transform this market. It is our responsibility to increase the pie and increase the market, deepen the market. Because we are the only 1 in this, obviously.

Got it. Mr. Reddy, one last question on the business side there on competition. I think you revealed yesterday also around the fact that NSE has launched, has tied up with CME for the same data and just launching futures on the crude side? Or if they already launched, I had not check their volumes. But do you think, from a competition perspective, anything that has changed in the last 2, 3 quarters that you think is worth noticing for now?

Okay. One is that WTI has been launched a contract on NSE, both in NG, natural gas as well as WTI contracts were launched on 15th of July -- 15th of May. And we are watching and obviously, the first day is some euphoria and then that gradually pitted out. So the average may be about INR 50 crores, INR 100 crores that we have seen the volumes. But having said that, I mean, I think we are too old enough to understand what's happening in this market. When -- about 3, 4 years ago, when it was introduced, that the equity exchanges also can compete with the exchanges -- with the commodity exchanges. There was a huge, what we call, concern, okay, they may take away the liquidity. So they consider again the same existing contracts, gold, silver, all that, nothing happened thereafter. They launch options, option on boards, nothing happened thereafter. And despite having deep pockets, despite having introduced what we call liquidity enhancement schemes, et cetera, et cetera. So this being a liquidity, what we call a cash contract, of course, we are watching it. But at this point in time, they are not successful in taking away our liquidity. And we hope to continue to -- I mean, to remain alert and then see whether anybody is participating and what is that we are not able to offer that other exchange is offering is what always be question. And we want -- I mean, there is in on our part at least, we will only try to give our best so that the customer is attracted on a professional basis rather than any kind of -- any other methods of getting the clients to our platform.

But Mr. Reddy, if let's say, I know liquidity bigger equity in this market, if they start offering no production fee, which I think we have done in the past. And these futures are based on an index, which is global. Do you think they can get liquidity or that is the harder part? I mean, transaction fee is less material than actually getting liquidity. Like how does liquidity get generated in this market for you? When you start the new contract, how does it come to you as liquidity?

Okay. I think a variety of issues influence. One is, I would call it as networking barriers are there. And the people who have already developed their ecosystem, it tuned to MCX. They do not have anything going and then encourage to the compliance costs, additional what we call making the systems what for? What is it that we are missing an opportunity in MCX? That is a new exchange. That is something obviously waves on everybody's mind. Probably they will operate you 1 day, 2 days, 3 days, but not forever, that's one in [ profit ]. Second thing is, obviously, these transaction costs do matter. But they do only when there is liquidity. And it's not a comprehensive thing even if liquidity is less, but still since you are offering a less of transaction fee, I should run. No, that will not happen because without -- if they may get stuck in with positions, that may cause huge risk when there is volatility. In this contract, there's a lot of volatility. So it's not easy to get out of it, unless there is liquidity. This is second primary -- this one. And the LES, liquidity enhancement scheme, is not permitted in liquidity contracts if it is ceded on any other exchange. That's what the SEBI rule is at this point in time. So they can't introduce officially any liquidity enhancement scheme in these contracts. And yes, these are the important things to be borne in mind. And as I'm speaking, they don't charge any transaction fee even in this contract.

Got it. Very helpful. Actually, moving on to just a few clarifications on the financial numbers -- sorry, first on the business, one more clarification. Our commodity index futures have -- actually were doing okay till a few quarters ago, and they have come down and flatline at that level. Is there any way to again rejuvenize them? Is there any specific issue with our index futures?

I think currently, we have one liquidity contract, which is the BULLDEX. Actually getting traded about INR 80 crores, INR 90 crores or INR 100 crores. So it's like that. But yes, we wanted to activate it. Thanks to the nickel contract debacle, so the index METLDEX contract has -- which was otherwise trading very good almost all INR 200 crores, INR 250 crores that got lapsed. So we had to reorganize the indices, remove the nickel from that and then recalculate that index. Now we will start -- launch the revised contract may be with some help from the market participants. So that is one. Crude NSG is not being actively traded. I think that is another area which we should work on it. We will do that also. We have been approaching the market participants. But one, I would say, suggestion or sincere guidance from the market participants, don't increase too many contracts. And we also find struggle to promote each one of them. It takes time for the contracts to mature. It takes time for the participants to understand. And so the ask of the members.

Shorter duration tax and indexes also is another want from the market. Even if you look at the equity market. The [indiscernible] which are doing are far better as compared to the monthly contracts and other things. So as we come out with this CDP project and after the post implementation out there, definitely, we can look at shorter duration contracts in index products.

Got it. Okay. Okay. Sir, on nickel, I think this has been discussed a few times in the last few calls. Can the nickel -- what really happened on the nickel front? And can it come back in terms of trading. What's the issue on the nickel? Because I think this has been mentioned a few times in the call last...

Okay. What happened was when the nickel contract was trading, there was an open interest and then people got stuck. And every 15 minutes, the circuit filter is going up and up and up and got stuck, but no trading is taking place. So a lot of margin calls have come and investors because it's a mark-to-market and at each and every point in time, we have to call for additional margins. So that's a bad experience that people have faced. And it's all because of the LME, whatever has happened in LME. And so the contract subsequently -- people have come out of it, but then the open interest, I mean, completely dried up because nobody wants to take a risk in that. While that was the case, we have approached SEBI now because at that time, it was also 1.5 metric ton contract because of the trading and [indiscernible] tests were identical. So the value of itself was about INR 13 and INR 40 lakh. Okay. That has gone up substantially high. So you can imagine what kind of margin calls would have gone to the investors on that. Now we are seeing, please give us a smaller denomination contract may be 150 kg, which was existing earlier. Then we will be able to launch something which market can take it. So that's what where we are. I think once SEBI permit us, we will be able to do something on that.

And how much was this as a portion of ADV before it was discontinued?

It's about INR 3,000 crores, it used to contribute to the metals.

INR 3,000 crores?

It was about -- in '21, it was about INR 2,254 crores at an average..

For the year?

For the year.

Average ADV.

2,200 How much?

INR 2,254 crore.

Got it. Any specific other launches ready that we will get on the business side in terms of new product that you think can meaningfully change?

We got approval for the steel rebar contract up almost a year or so. And as I said, the electricity contract, is [indiscernible] contract and that is we are still waiting. And this particular thing we will launch sometime in July, this particular steel rebar. That's what our expectation is and after the platform goes live.

Got it. A couple of clarifying questions on financial, and then we'll just discuss software for a minute. Mr. Bolar, on the cash, how much is the net worth cash? How much is the margin money right now?

Our own cash is around INR 900 crores. And the margin that CCL had as on 31st March is around INR 600 crores.

And just lower than what we had, both are actually -- so cash, net worth cash is similar on 30th to 31st December and margin earnings lower. Margin was actually, I think, INR 700 crore, INR 900 crores at that time.

INR 900 crores, which is -- because the members have got an option of giving other collaterals like bank guarantees and fixed deposits. So some of them would have...

So but if our margin money goes down, this -- the income that we have, the interest income that basically is part of our operating income also goes down, right?

Yes. For example, in December, we had INR 9,500 crores total margin, out of which INR 934 crores was in cash. While when we came to March, it was INR 9,800 crores, out of which INR 600 crore was a, balance was other collateral.

Got it. And Mr. Bolar, how much are we making in terms of yield in terms of on a net worth cash and margin money approximately?

We earned last year at around 5.93...

Last quarter?

Last quarter, 7 plus.

7-plus percent. Got it. One clarifying question on the expenses. If I take the total expenses in the P&L and delete, sorry takeout, software cost and take out the people cost, let's call the remaining figure as other expenses, as this is an expenses, I was just doing some calculation and it seems that other expenses in quarter 2 are close to about 240 million, which has become between 280 million to 275 million in the last 2 quarters, quarter 3 and quarter 4. I'm just wondering, is this the right way to look at this? Is there anything specific happened in between?

In the last quarter, we had marketing events. It was, because of the COVID, we didn't have any -- we didn't do anything substantial in 2021.

Engaging members.

Yes. So with a lot of engagements with members that we carried out, which is in Q3, largely in Q3. Other expenses also have gone up, traveling has gone up while early as you know that all online. Traveling has gone up as well as administrative costs of maintaining the building as compared to March '21 because of the pandemic, it was work from home while now it is work from office, so correspond other expenses have also increased.

So Mr. Bolar, if you look at employee costs and let's say, other expenses, I'm taking so the only item that I'm not considering is software expenses. Are we at the number where it is a run rate expense? Or do you think there will be big variations in these 2 categories, employee and non-software expenses, like non-software nonemployee expenses?

There wouldn't be a major variation. Again, it depends on what we intend to -- how do we intend to engage members once the new platform goes live.

Got it. Very helpful.

One more dimension to it is, of course, other than software, there's also a CME expense we pay, it's based on the turnover. And so crude oil contracts and energy content do well, then obviously, that also will go up. So I think that you need to account for that, that has gone up for extension.

Got it. I do that. Super. I think, Mr. Reddy, if you can give some update on the software, I think, which is the hottest discussion on the business. And I think to be honest, any clarification in light of -- you have mentioned 2, 3 different kind of work streams, which are going on parallel and in cities in the call yesterday. If you can help me understand if all goes to plan and everything is working perfectly, are we -- is it a 4-week requirement from here? Is it a 3 weeks? So because there are so many technical terms in the call yesterday and maybe I missed out. Is it like a 3-week thing, 4-way thing, if all goes to plan. And again, I'm not saying where are you on the plan, but what happens from here onwards?

Yes. I think if all goes well as planned, it should be like a 4-week this one, because we want to give enough opportunity to the members in terms of participating in the mock, okay? And then members are able to participate, maximum number on a Saturday mock or [indiscernible]. Because their lease lines are mostly connected to the DC that some of them have here. And on all other days, we are doing this one on DR. And they do participate members, but maximum comes on Saturday because without any changes in connectivity, the straight away participate. And in the normal course also, it is 99x at DC, they will work. So obviously, the latency, speed or whatever you call it, all that is examined on the DC, what we call connectivity rather than the DR. So that's what it is. And otherwise, we have given a long number of mocks on Saturdays and many have participated. And major members have no doubt have participated, there's no problem about that. And as somebody has asked in the call also, there are 600 members and you said about 170 participated.

180, yes.

And what I said is 600 is the registered number but some have surrendered their applications. They are all funding with SEBI. So unless SEBI approves it, we can't knock off from our what should I say, list. So to that extent somehow admitted, but then they have not started operations. On any given day, about 350 to 400 in between people, members participate. So that is what our target has always been.

And Mr. Reddy, in this 4-week plan, so far, there is no seemingly thing, which is a deal breaker, at least so far in the visibility. It is just a process that we have to follow? Or are there any big red flags that are still being addressed?

I'm not foreseeing anything. I mean, God willing, I'm sure we should be able to make it is what my response. We are taking every -- we are taking care of every this one. There are a few slippages on certain activities, but I think we can coverup.

And Mr. Reddy, I think last thing, even if we are not 100% there, I think as you mentioned on the call yesterday, can you be 98% there and still implement, still move on the new software? I mean because there are things always in software implementation, which keep happening over time, so do you think that is also a possibility?

No, whatever all must have go-live kind of things. They're all in place and that's what demonstrate to the regulators are otherwise all of our Board and our own. We have to satisfy ourselves, yes, we are good to go kind of thing. So like various audits are underway and the parallel runs and our NFR test. All of them are happening simultaneously. So we should be able to complete it. As I said, that is what our desire is, that is what our endeavor is to make through all our weight behind time and effort. Everything is only going into this. Nothing else.

Yes. Yes. So I think 2 clarifications just on this. The regulatory time is included whatever you have to seek approval from SEBI or intimation required is already this 4-week time frame?

Yes. I mean, SEBI is watching very closely the development exchange. Yes.

Got it. Got it. And then last question is, again, let's say, 4 weeks down the line say, 21st of April, you guys are ready. Is there any requirement to run both systems parallelly for all participants for some time? Or that is submitting right now?

Don't know. Because it's not feasible also. It's not feasible also. Members can't have 2 back-ends and maintain what reports they get. The whole mock, purpose of mock runs is to give them all the reports and then understand whether what trading they have done, whether they got obligations right, all that kind of things.

And lastly, there's no training requirement to the end members? I would assume they will not notice a change in their software? Or would they?

They will not notice it. See, there are 2, 3 dimensions to it. One is that CTCL players. So they have already -- vendors are there, we give API. And vendors customize it to them. So we are not changing the structure and all that kind of thing. So they will continue to see the same thing what is happening there, okay? Now, it's only the TWS, trader workstation, which we are developing separately for them. But then the business that comes from the trader workstation is hardly anything, hardly anything. So there, we may have some functionality may not have given some functionality. But that is for the -- members can always go to a CTCL vendor and then take their software to run this. That's not an issue at all. No, no.

Got it. All right. This is super helpful, Mr. Reddy. Thank you so much for making the time. All the best to you and your team for successful implementation of software in the time lines that you think are right. again kudos to the entire team to for keeping up the good work.

Thank you. Thank you, Mr. Aman. Thank you, Mr. Nicolas. Anything from you, Nicolas? Any?

I think, Aman, covered all my questions actually. Thank you so much, as always.

Thank you. All the best. Good day.

Good day to you as well. Take care.