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

Mr. Aman and Mr. Nicolas -- for this initial call. Since you have been familiar with the topography of the business. So please go ahead and start firing the questions.

Thanks so much Mr. D, Mr. Praveen, Mr. Bolar for taking time to speak with us. We have been, as you guys know, long term shareholders of the business. And we hope to be long term shareholders. We had a few questions on operations front, on the financial front and a bit on software, which will run through. I think your software has generally been discussed in the historical calls a lot. We will keep that in the end but maybe we can just talk a bit about the effects of software implementation on business. I think the first thing I want to maybe ask is -- are these series of futures or options that we are not able to offer to our customers both -- January options that basically could -- because of the software implementation? That is part one of the question. And if that the case, will it start reflecting in revenues of our business in, let's say, quarter 2 or quarter 3? Or does it reflect only in that quarter or this quarter 4 in January when the options series kind of become slight. So I -- maybe that would be very helpful for us to understand.

Okay. Look, I mean we have so far wherever there are approvals are required. We have issued contracts in December -- you are aware that only the first 2 months contracts are active and then third one, maybe some what inactive and the fourth month onwards there all inactive contracts. So once we finish our implementation, maybe by September end, we should be able to launch other contracts as well but then there were also contracts launched as per the requirements maybe for one year or so also. So that -- there some contracts still July till April. I think we're falling under that contract specification requirements, where in some contracts, we said we'll launch only 3 contracts, some contracts, we launched 6 contracts like that. So they are all in place at this point in time. So there's no additional contracts we can launch unless the one contract expires. So in the month of August some contracts will extend then we have launch the new contracts. So if in fact are all are liquid contracts anyways. Even the existing contracts are liquid -- if you see some of the [Indiscernible]. So they are all unique fit. So it doesn't impact our revenue anyways.

Just for my clarification. At what point of time , let's say, from, let's say, August through December, and for the sake of assumption and make me a assumption that software gets in the mid of December, that's assumption just for the further correlation . When does that start showing up in revenue or ADT of futures or options. Are you seeing that 3 months in advance? So let's say if we don't have new software in September, then October volumes may have an impact or that is not correct understanding?

No. October volumes -- see, the active contracts will continue to be active. New contract is what the customer wants, New contractor of January, February. They will only will remain [Indiscernible] the anyway. That's what the point I'm making is. All will be liquid, They will be active.

So sir, one last clarification. Even if on 31st December, if you fix the software to the TCS software -- in January 1, you can start having the same APO that the market required. There is no ramp-up required because those contracts are not being offered a month in advance. Is that -- I'm just -- sorry, I don't understand this very well, and as I am trying to understand that if it goes to the fag-in, then what happens to revenue kind of thought process?

See, in my personal view, that we have to offer contracts at least 2 months before, the third month contract we have to offer at least 2 months before. So the [Indiscernible] contract has to be offered necessarily maybe by end of October, so that we will be able to create liquidity because in the month of November itself, in some context, the third month contract that is January contract liquidity comes in the month of December anyway, January contract has to be there for them to roll over. So the question doesn't arrive -- that we can afford to show delays. And again, it is a [ city ] who regulate if you -- where we will be applying in the remaining time to get their approvals to continue offering the contracts.

Got it very helpful. Mr. D, second question is around growth. You guys have been doing an amazing job in underlying volumes, both in terms of auction volumes. And that is getting -- compensating more than sufficiently for future volumes. Anything else from a new contract type? And we had started certain contracts last year and early this year. Anything more that we are doing to deepen the market for both futures and options or any new contract type that we are looking at which can help these things and which can be seen in this year or next year from a financial perspective?

See, once we launch our new platform money, we would like to launch all the new contracts. So one touch key is the Steel TMT Bar is one, and also the smaller weekly -- not weekly -- shorter duration contracts, we would like to launch. We had a goal to often contract of a monthly. Again, we have not launched it -- and of course, this kind of a Ex transition delay also has -- had delayed that kind of new launches. In that sense, it is impacting, but we would like to overcome that, that why we are keen to move out to the new platform at the earliest. So once we launch it, we will be able to apply also for new type of contracts after successful transition.

Any of these you sure that you field could be large in terms of potential -- like potential. No one knows how will they finally turn up, but when see today this is the history of similar commodity either in MC history or in [Indiscernible] or versus the demand that you go up. Which one has the most high potential?

See, the liquid contracts will continue to be liquid even if the variance is assured. So if assured contract is issued in gold and in what we call crude [Indiscernible]. Obviously, it will be a successful -- I mean, the trajectory will be on the success side. So that's the way I look at it.

I think we spoke about competition last time. At that point of time, I think NSE was about to launch crude -- relaunch crude at that time. Anything that you've seen premium competition in the last 3, 4, 5 months? Or any step that you've seen that we changed anything in the future?

My colleague will give you -- please mention month wise ADT OI and what else you have...

Currently, the statistics that we have in the month of July. For example, in case of WTI crude oil around INR 37 crores have been traded and there are both [indiscernible] on a lot open interest is there. And Natural gas, it is about INR 7 crores for the month of July. And open [indiscernible] Around INR 127 crores loss. This is how what we could be able to find on the website.

Got it. That's pretty low as compared to what you guys do daily. That's very interesting. Good. I think on business, we don't have any specific other questions given we have been generally well entrenched in working with the business so far with you. I think -- maybe Nicolas can start with the question he has for Mr. Bolar and then maybe we can come back towards the end on the software side.

Sure. Maybe we can start with options. I think you've touched on a similar question before, but on option premium. We know that it's hard to say or hard to determine how much option premium no sell value, we can expect, but may be looking at long-term -- in long-term basis when options market has reached a relative stage maturity for us. Is there perhaps a certain way of gauging the what are option premium for most [Indiscernible] would look like? Is there a certain band or range we can see resettle towards?

Generally, what happens is the option premium to most our turnover depends upon several factors like volatility and the growth of the market and how the markets are deepening, okay? The way we can look at it is as market is growing faster and going bigger. We can say that liquidity is building up in the out of the money contract throughout also. So that is a very healthy effect, and we can say that as they are getting deepening, the liquidity building are -- people are even able to trade in out of the money contract. So because of that, overall -- the option premium to turnover ratio may come down. But as long as the growth is happening in the premium turnover, that is a very healthy sign. That is how we can look at it. Even if you take other markets, that is they have good or lower the period aspect. But each market has a different phenomenon like you can not fix any particular ratio or a particular percentage that it can be for it. That means it is going to be there for option to most turn -- difference on several factors, and we have a different ratio we were somewhere around 3% earlier, now it has -- It is around 1.9%. So it's very tricky to say right now, what would be the percentage. But as long as like you said, it is premium turnover is going up, it is a good healthy stand for the market.

We expect in, we expect a ramp up in our features subject to 2 conditions or rather pre-conditions to be met. One is that the margins in the futures contracts have to be substantially reduced because of our SGF constraints, we are important ratio margin. And the healthy sign of these contracts open interest is growing. So that means people are staying put in these contracts. They are not just day traders and fly by atopic standup. As a result, the SGF cover is increasing because SGF cover is based on primarily the overnight risk and then risk to liquidate positions for a sort of 3 days, 4 days kind of thing. And so that is the reason why this is not growing the underlying futures. The second is even for options to grow, there's something called a short option minimum margin, where if somebody is taking your position in auctions and as well as features at contra-position especially in the short where in options is short and then in features is long, obviously, they need to cover their hit, then the margin requirement has to be substantially lower. But that's not the case, who so ever are taking exposure in features to cover their risk in auctions, they are being charged for me whatever [Indiscernible]. And I think that is the loss which we have represented to the regulators and the broker association is also represented and then if we're able to get a past [Indiscernible] dispensation, probably the whole scenario is expected to change. How much it will change, I can't say, but then I have -- there is a ask chorus, I would say, among broker community, please have this one resolved before they're off to.

Mr. D, is there a timeline on which representor has to decide on these two request or the presentation that you have made?

No time line. They have -- again, they go through a kind of a standing committee on the risk management systems -- they have a big committee on that, they have to take their consent and then only it will come. I don't know when it will need that committee. And that committee representative do the market part as well. I think those something of [Indiscernible].

But from a stage perspective, is it -- would you say it's in the early stages of this question or in the more advanced stages?

I mean, while the keep -- we keep representing after time and again, sending reminder kindly help us to get this resolved. And it's a plain off, there's nothing much to be discussed or debate. They know that -- because if you get in into the equity market and so that's what we are asking for. Maybe these are commodity markets. They are less receptive to major changes in this -- and because equity market is much higher than what this year. And -- but then definitely, it's not an agriculture commodity where locally determined and the crude oil and think for international products gold et cetera.

I think I asked a question at maybe just to close off the option part. In terms of this labs we charge, I was just curious for my understanding how those INR 40 and INR 50 rupees were determined? And is there any possibility for these to change over time?

Well, there is a possibility of change over a time. But is it in the near future? My answer is no because -- it was just introduced a year ago, if I am not mistaken. So I think it is too early. And at least for 3 years, we should see that we don't change it. Otherwise, somebody will go on and complaint to the regulator -- some here and there and then you are changing frequently. Or somebody can accuse us of misusing the monopoly position. So we need to benchmark it, maybe against the inflation that is happening -- we should go it can't be just increased it to INR 40 to INR 50 or INR 50 to INR 60 something like that.

So maybe just on some financials, you can touch on the product license demand. Would you be able to tell us what that number was for Q1?

What also is this [Indiscernible] what exactly does product license equal to -- what is the -- can to CNA. Okay, only CNA [Indiscernible]

And how much was it in quarter 1? Could you disclose -- is it possible?

Yes i mentioned it .

I mean, as the June quarter..

Right around INR 7 crores. And our presentation that has been merged, it's around INR 7 crore -- INR 7.77 crore to be precise.

And just quickly on that, is it the same fee discharge options and features that license fee to CNE discharge both on option to features. Okay. And in terms of computer technology expenses, I just have 2 questions on this line. One is, it's been roughly flat for the past couple of years, even in 2023 and then I think in 2023 to increase to almost 40%. What was the reason for that jump? And also secondly, on this expense, is there any -- does it link it to -- will be impacted by the new software change? Or is that the [Indiscernible] means?

I think we're looking at underlying software and the product license, which includes the payment that we made to 63 months. The increase is mainly on account of the payments that we're making to 63 months.

Got it. Right. Okay.

I've been able to explain because the payments in June '22, we did not have any extraordinary payments to 63 months. We are paying as per the earlier terms even in September 22. But from October onwards, we have been paying that extra amount, which is reflected in that account. Our normal technology expenses there for a back end it's almost -- I mean the around 2% to 3% increase. So there's no major increase in our normal technology. Is that a major increase on account of what we think we have been paying to 63 months in the past few quarters. And in this particular quarter, as compared to -- I mean, even in March quarter, we have been paying INR 81 crores on a consolidated basis. In December, we paid INR 60 crores on a consolidated basis to 63 months. And going forward, as we mentioned in the previous calls, earlier call, that for the first year, once we go live, we won't be paying any AMC to TCS. It will be under warranty. The first [Indiscernible] is under warranty. And for -- I think onwards, we'll be paying them up AMC. But we'll be incurring some of expenses like you'll be renewing certain operating and licenses, which presently is under CWIP, once we go live, those would be -- we'll have to tag it to our P&L. So it will become revenue expenses.

Mr. Bolar, have you have you ever disclosed much will be the quantum -- you talked about single-digit number in terms of AMC cost and the single-digit number in terms of other expenses, even the infrastructure that you're having. Is there a more firmer view that you guys are presenting or not yet on the cost?

They're not disclosed so far.

And not even the CapEx part because I think in the last quarter we as a request, I assume that you have not disclosed it so far.

I mean in September, we'll give you figures.

If I may -- because you don't have any question on financials otherwise I have a slightly conceptual question on SGF, that I want to ask Mr. D. Mr. D,, how does SGF work? And how does it grow with the business growth? So when we look at the way we predict the business, how should we think about SGF as an item in the balance sheet?

See, the SGF contribution goes to clearing corporation and including corporation, we sit as a separate fund -- and it's only a one-way street. You can contribute in the [Indiscernible] when you can't plan a benefit out of it. And its growth base, even interest income but it gets. Otherwise, there's no requirement of permanent contribution from the exchanges but all these penalties that are being levied by the clearance SGF -- so that is put together about our contribution of about INR 460 crores, overall contribution. That is our means both CCL and 75% is from CCL and the exchange is 25%. And the balance that is about INR 140 crores Is these penalties, maybe some conception -- that's the way it is.

So is it related to volumes or not at all. You're saying that from now on, if the exchange growth at x percent, does this SGF needs to grow or unless there's no penalty/interest, of course, are close to this account. But if your volumes go up 20%, does this grow in any way?

So if the volumes go up, and I say it is a open interest, I would like, insist open interest but not the turnover. The open interest keeps going up, however is open interest. Then the contribution has to be made by the exchanges on a month-on-month basis, okay? And so you take the average of the open interest of this month and then arrive at whatever the fees. And then next month, you calculate it. And a month after from the first of the subsequent month you are to make sure that so much is available, whatever has been arrived at as the months of July. So month of July will be reflected from first of September until that time.

Got it. So this is linked to volumes. Is it linked to features or options or both?

It is open interests -- for everything across.

And this interest that comes here, I am sure it doesn't come to us in our P&L account, right? It just simply gets accrued and compounded in the same account?

That's right.

Nicolas, do you have any questions of financials or should we move to software implementation.

Nothing on financials.

Mr. D, I think you talked about software implementation in the quarterly analyst call. If you could just give us a sense of where the comfort is right now. And I think the box which have been happening, any color that you can provide since the quarterly call will be very helpful for our understanding and building on thought?

I mean, while the -- while we were very enthusiastic to go live in the end -- quarter ending June we couldn't make it for a variety of reasons, including the [Indiscernible] is taking a long time and some stakeholders have some reservations on the -- on that kind of situation. So we said -- lets fix all of them. And I think now they are following the case, you would be coming under control. And the court freezes have already happened, integration testing has started. And now we will be able to open up for member smoke, I mean this month alone -- in this month itself. And anyway, we have been given a target to complete it and go live before end of September. I think we are pursuing that target and we should be able to make it -- that's what our commitment is.

Mr. D, the new -- for the 2 quarters that we see are in 3 months -- is it purely a negotiation between them and you? Is there an arrival process on why this number should be the number that will not reflecting to P&L.

Unfortunately, the warm negotiation needs something give and take. And there's nothing called give. There's only one thing take whatever I have given it, that is what it did. That's it. It's an optional choice -- that is on the situation we are in, and that's how we.

In terms of the regulators, whats their stance because I think they have dual responsibility, they oversee you, but they also have to ensure they keep running. So you say an insistence on to make sure that there is always 100% [Indiscernible] your PC software and then only you can move out? Or how are they kind of thinking about this?

See, the lots of concern that the regulator have and need to have on the Board has is that you are a dominant market process institution. Several investors, stakeholders have their stakes in your sustainability and system going just as usual kind of thing. So you're also a naturally important project in the sense and so they are very, very closely monitoring and helping us wherever or whenever we ask for any help, and they have been very supportive to you. And I don't think they could have done anything more to mix I think that is something -- having said that, yes, they have to ensure that none of these stakeholders are impacted due to the system going down and other things. So if at all, there is a degree of -- high degree of precision if they are looking for, they are looking only in the interest of the markets and stakeholders and not otherwise. So that's the way it is at this point.

I'm assuming, Mr. D, I think there is no -- this entire process of business which has happened, There is no regulatory penalty that can come on to you guys because this -- I'm assuming this is purely a third-party implementation process as there doesn't -- there's no voice regulator on that part that disparity required because you guys delayed it. I'm just wondering, I hope there is no new charge coming from the regulatory side on this?

Well, regulatory definitley concerned weather they will -- whether their is a charge on the exchange or not, but individually, obviously, we are all accountable for the good impact the project implementation.

Very last thing, [ PCS ], how they've been supportive given they have been involved very deeply on this and is getting a bit pushed out, have they early supporting you guys?

It is the highest developing being monitored this project. Again, for them is also the higher reputational risk. They do want to make it a success and neither we would like to take no for an answer, nor they would like to take no for an answer, in this case. We want to make it effective.

So this is heartening to hear. Mr. D, I think both Nicolas and I, wish you all our very best for the implementation of the software. And we hope to see you guys soon. And hopefully, by the end you would see the software will be implemented. So that we will be able to celebrate. So I really -- best wishes to all of you.

Thank you. Thank you so much. Thank you, Mr. Aman, as ever, you have been a well wisher and supportive, so is Mr. Nicolas. And saying that, we will do our best to enhance the stakeholder value in this company. Thank you so much.