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

Welcome to Ashmore.

Welcome, [ Vasu Govil ]. And go ahead, please, ask your questions. Speak on the mic. Yes, it's on.

So we just wanted to get -- in terms of just the software part of it as to where the -- what is the road map going forward? And what is -- how should we interpret things in the next 4 to 6 weeks?

Yes. As I said in the call also, we are keen that we launched in the month of June, maybe whether it should be third week or fourth week, of course, we will continue to find. But as many more chances we can give to the member, of course, we will be giving it. And that is what our desire is, and hopefully, the feedback we get from members is also good. Then accordingly, we will take it on, on this part of -- I mean, early June, we will take it on.

On the business side...

Please go ahead. Go ahead.

On the business side, we could see some mini contracts launched. If you could give an overview on how the volumes are improving and what are we hearing from the [ Street ]?

See, on the mini contracts, when they were discontinued, we lost a lot of client base. But then many of them have come back. There's still -- a lot has to come, not that all of them have come back. But it is happening because, for almost all 2 years, we have missed out those contracts, mini contracts. And probably, all those investors, although we have reached out -- members are reaching out, all have not come back. Secondly, these mini contracts have been launched only in 3 of the base metals, where the delivery unit and the trading unit can be identical. We are also represented to submit parameters to launch differential delivery and trading unit contracts in nickel and zinc -- I'm sorry, nickel and copper. Because copper comes at 200 tonnes, nickel comes at 100 tonnes, and they almost all cost INR 35 lakhs to INR 40 lakhs, and that's too expensive for individual investors to trade. One lakh means it's so much of money. And you can imagine the margin amount that has to be put in. So we are requesting them to reconsider this. I think they are looking at it. And hopefully, we should be able to get a positive response on this, perhaps maybe approval from SEBI.

What could be the volume now in terms of mix for the mini contracts?

In mini contracts, yes?

In mini, like -- apart from base metals, we also have the mini contracts in crude oil and natural gas. So in the month of March, in crude oil, we have done something around INR 191 crores in crude oil mini; natural gas, around INR 37 crores; and aluminum mini, INR 44 crores; zinc mini, again, INR 122 crores.

Well, those numbers are low numbers for us, honestly. Because when it was its peak of its, what we call, growth, we had 20% to 25% coming from mini contracts. So you can see these numbers are low numbers if you look at from the composition point of view. And so there's a lot of scope for growing -- growth. But generally, between futures and options, we are seeing again, as we saw in equity segment, the options continue to become a bigger part.

Is there a way to understand how much is -- from a hedging point of view, how much is, let's say, just pure speculation that people want to -- and that eventually is a function of the volatility, which is there, that you are seeing globally. But because it's pretty similar to what we are seeing in equity market that the Indian equity market is also behaving in a very different way as compared to the global equity markets, and we are seeing a similar trend in the commodity markets as well. So any thoughts there as to how do you see this evolving? I'm not talking over the next 1 or 2 quarters or 1 or 2 years. But if they were medium term, 3 to 5 years, where do you -- how do you see the industry evolving?

See, I think, from the traders' perspective, they are very comfortable in options contracts. They know how to strategize when they are trading. Now obviously, they will jump on to it. They look at this because they are not delivery testing any more any -- all these option contracts. And again, they devolved into the underlying futures. Now when they devolved it, again, there is a -- delivery threat is there. So they will square it up before they get into the delivery mode. That's it, staggered delivery period. So obviously, they are keen to work in this options contract. Now if you ask me how many hedges are there, my view is, on the writer side, many of them are the people who are in the industry who have a backing of the metals because option writer will be exposed. Yes, there are -- it's an unlimited risk they have. And so obviously, those who are in the industry who are -- who have got stocks or exposures in the physical market only can write. I think that is also encouraging them because they are getting the premiums. A good amount of premium, they are getting it. So they see that quarter. So that's what they did. While the buyer side may not be so much of hedging participation, but definitely, the writer side is there.

Okay. And how do you see that evolving in the next several years?

I think it will grow. Option markets will only -- will grow. That's what happened in the equity. That's right. But we also expect the underlying futures to grow, not that they may grow at a rate at which this is growing because they also need to hedge their risk if somebody is -- writers have to hedge their risk also. So they will be doing it -- must be doing the underlying futures.

Okay, okay. And then in that sense, how do we look at the volume-to-premium ratio? So in that [ sense ], which we have moderated, compared to what it was at the high premium-to-loss ratio, option premium-to-loss ratio.

Yes. options are -- you see, earlier, they used to be created more closer to the money, in the money or at the money kind. But now they are moving [ away ] from it. So the premiums have come down, the total. So obviously, our income, also, so the tax rate, has come down.

But then that will be compensated by the increase in the overall option volume?

Not necessary. Not necessary, okay? But yes, the moment you move away from the, what we call, at-the-money kind of contracts, there is a suspicion that people -- illiquid contracts, people are trading. That is the kind of threat is there. So maybe they would like to stay within the 5 strikes upper, at the money are down. That's the way...

Generally, what happens means -- if the market is growing in general, the liquidity will be much spread. That is over the period of time. Like your out of the money also will start becoming more and more liquid. So it is actually a healthy thing, like you grow up, and it is going to be spread across that one. But there could be a marginal drop that is going to happen in terms of income -- the premium to -- if you note the amount, if you look at it.

But another thing also. The volatility also helps to trade in out-of-the-money contracts. The reason is because the people are expecting the volatility to shift the other side. Then those contracts may become, in the money or at the money kind of. So to that extent, volatility helps in trading, I mean, spread that distribution of trade.

So is there a floor that we can imagine that it will not go below a certain level? Or...

We can't. We can't. Well, you can imagine that it cannot be more or less than INR 40 per crore -- per lakh. Because that is -- we have only 2 [ slabs ], 40 and 50. That's it.

And in terms of -- so yes, are we pausing -- so let's say, whenever the transition happens, would they be -- would you be in a better capacity to launch a lot more products because of the delay? Is this -- is that holding you back from launching products? Or that's not something which you are -- which is impacting your ability? Because, again, you would not want to increase the complexity in the system before you migrate.

Yes. I think we -- as I said, that there are some gold options contract. Or in a monthly option, we are looking for a -- not monthly. Monthly, it's just contract, a bimonthly option, some other thing. So to that extent, the technology platform is to be enabled. So those ones we are not building. And so similarly, I mean, some of the new contracts, which we'll be introducing, they will be primarily be futures contract then option contract. If it is an option contract, there has to be the same monthly contracts or bimonthly contract, not in the other way. Yes. So that, as I just said, our primary goal post go-live is to work on releasing other, what we call, functionality related to the negative pricing or kind of things which are critical.

And once you migrate to the new software, it would -- you then have the flexibility to launch whatever...

Yes. That, we will have.

You will have.

I mean, if it is not there, we will...

You can build on it and you can -- yes, that's helpful.

That's right.

This quarter's average expenses, when you look at -- it was at 14 clients...

I beg your pardon?

The other expenses, that line item, this quarter was 14 clients [ saw growth ], slightly higher than what our run rate is. Was there any one-off?

No one-off. And as I mentioned in the call also is that I see our subsidiary, they account for CSR expenses at the end of the year. So some INR 60 lakhs, INR 70 lakhs came at the end of the year. That is only from the MCX sales perspective.

But still, it looks slightly higher than what our run rates are.

I said no, nothing exceptional.

And with this new software launch and rollout and with the new products and all, do you need to add more employees to the current employee base on that?

Not really. I think once the system stabilizes, then the management will take a call on the IT spend, the team and the technology team because then it could have stabilized. We'll be having TCS to support it. So it would be -- and for many IT professionals, it will be then under the maintenance mode. It won't be in the development. So many of them would consider whether to remain or move on because it would be on a maintenance mode, not in the development mode. So I think maybe the skill sets would be a bit different.

So barring the software expenses, which is volatile, the other expenses should be growing at a very nominal rate?

It won't be proportional, definitely not proportional. Because another product is altogether new, and you require a different kind of skill sets. Then I think it is a different story. Otherwise, given the same type of products and other things, I don't think you would be requiring -- or increase in manpower is required to help this. It is proportionate, not -- definitely proportionate, that is.

And as we have seen in the equity segment, the competitive exchanges, even if whoever has launched commodities, their market share would remain proportional because the liquidity and the volumes continue to be dominant by [indiscernible]. Because you don't have the data, people moving there, the prices have remained -- it remains illiquid, and to that direction, the dominant exchange continues to enjoy...

We are not supporting our products by any liquidity enhancements. We hardly have one. So that's what I'm saying. So we are okay with it, and we're looking at what other people are doing.

I mean the NSE has launched WTA, and these are futures that are launched. And we are watching, of course, we are also engaged with our number of brokers. So they are of a view that as long as you continue to give your service, good service, technology support, then there's no reason why anybody will look at anywhere else.

Right. And is there an angle of, let's say, having some impact within the GIFT City, does that help to get some foreign volumes? Or is there a gain there? Or you're saying that that's not something which you are -- so I understand, right now, you may not be targeting. But even, let's say, in the next 1.5 years, is there a sizable chunk that we can get by with this having -- so again, I'm taking a cue from equity, like SGX Nifty, is now going to get traded from give just because there was so much leakage of volumes, which was not happening -- not getting captured in India kept getting captured outside. Do you see any contract, commodity or whatsoever, where -- or a goal, where there is this white space, which is there, which, if you start trading in GIFT City, you may capture some of these international volumes?

Okay. Let me back -- if you see our major contract with a crude NG, this is based on CME prices out there in Dubai, this is traded, Moscow, maybe in Singapore, okay? But starting in GIFT City, we have to get somewhere here only. Obviously, our domestic players will not come there and because they are all dollar-denominated contracts, and there are a lot of other issues are associated, okay? And so they may not be able to be paid, in that sense. The number 2 is that the gold and other contracts, already, there is a spot exchange. They themselves are struggling in terms of getting the international bullion trade -- has to come over there and then participate. And I think if that ecosystem, once built, then probably we can look at some trading out there, but it's too premature or early for me to say anything on at this point, okay?

And last 2 questions from my side. So one, in terms of going live with the new, do we need any exchange approval or any authority approval?

To my knowledge, this is not required, but then we know what we have to do. I think we will be doing all that. Like term terms of auditor certification and all that, we are doing that.

You were doing that?

Yes.

And two, in terms of the question that [ Sagar ] alluded to, so in terms of employee support, base support, so do we have a support tech staff within the company? And let's say, when the migration happens because it's a new product, new platform, how would -- so whether those employees would get upscaled to the new software? Or how does that migration happen? Also, sales tech pool of employees that you have in the company.

Yes. And see, we have recruited a lot of seniors over the last 2 years. So it's not that we started without that pace to be there. And in many cases, the vendors, themselves, we have a support. Along with the product that is developed, 3 years, 5 years kind of support, we have it. And so we have a different skill set that is needed. And there's no technology is too different, in that sense. Maybe with a vertical, you have a Db2. So we have recruited all those people who are near or quite familiar with that kind of functionality,we have. And in [ the media ], first one near PCS systems and support, this is [ one]. Okay. Thank you.

Thank you.

Thank you so much. All the best.