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

Good evening, Mr. Aman and [ Nicolas ]. Welcome to this call on the Post Q2 FY '24 Results. You have been an investor with us for a long time. And thanks to you, compliments to you both, compliments because you made money also on the stock that you have invested. And thanks because as a management, I'm sitting in a management seat, and obviously, I look forward to the support of the shareholders all the time, who fairly appreciate the ups and downs of the business and instead of getting vacillated about quarter-to-quarter on the results. And I think if you -- you have been, as you said, cheerleader of the management, and that has helped us to stay focused on our goal because if too many expectations are satisfied across and keep pulling, then obviously, management will wonder whether they are going on the right track or not, and that didn't happen. And I think that's very important. And I'm really grateful to the -- to all 3 for supporting us all along. Now over to you, you can fire all the questions, whatever you like.

Well, of course, thank you, Mr. Reddy. Thank you, Mr. Bolar, and thank you, Mr. Praveen for giving us the opportunity. Firstly, I'll say that congratulations to all of you. I think what you've accomplished is truly something that we are proud of, if I may say, because we continue to believe in the dominant position of MCX, but the transition was -- had its own hiccups because of external reasons, but I think you guys have done an amazing job, and we really are very happy with whatever has happened in terms of an outcome, and kudos to all of you. I can't emphasis this enough how happy and how proud we are in this entire outcome. So I leave it that you guys, as you rightly said, the compliments well taken on the fact that we have been happy shareholders from an outcome perspective or from a share price appreciation, and we continue to believe there's much more longer-term opportunity with the Exchange as well as the team that we are backing. I think I'll -- I wanted to spend some time discussing the performance, if you guys can help us understand a bit more about both the current and whatever you could talk about the future in terms of thinking. On software side first, is the transition done completely lock, stock, barrel? Or does 63 Moons still have something lingering in the system right now? I'm just wondering, is that completely cut off from an outcome perspective for 63 Moons? Will they just get what they deserve in quarter 3 and then they're out completely, nothing more?

Absolutely right. And I think on quarter 3, another lump sum payment has to be made. I mean, it was already paid in the 1st of October or 30th of September for this quarter, and that will be reflected in the Q3 results.

And operationally there's nothing now...

That's what in terms of -- there's nothing now, and all is done. There's no more. And -- but systems are on. On in the sense, systems are not disconnected because they're supposed to service, if need be, till the end of December. So probably we will take a call when to, what you call, power off the systems, and cannibalize and then use other expansion that we can use it, the existing ones.

Very helpful. And is there any part of the model which only exists in the old trading software? Is it everything that you -- modules you wanted to have, everything is moved completely to the new CDP platform?

Everything is moved, including the data for about 20 years. So all that is...

Very helpful. Mr. Reddy, when you look at the current technology now that we have CDP, from a support perspective, is it more internal support that we are giving? Or is it also -- TCS, you talked about the fact that there was 1-year warranty. But do we have internal team also to support at least part of the upkeep, et cetera, or is it completely outsourced right now?

It's like this. We have TCS support of L1, L2, L3, but they step only if there is any problem. But the day-to-day operations are run by our own team. So that's the way this model is. And this service is there for 1 plus 5 years. So CDP is already there for 5 years, paid -- I mean to be paid.

Got it. Okay. Okay. And sir, one last thing on software. The entire sub-judice matter in between, which basically put up at least a kind of partial delay on the installation of software, is that something to decide or still sub-judice?

It's been closed. The Court has disposed off the applications, whatever the petition that was filed. So it's already in the public website, in the public domain. And we can share also being a public order, public...

Okay. So there is nothing more on that front at least to our knowledge that needs to be done? And that was the Chennai High Court, right?

That's right. That's right.

Got it. Mr. Reddy, now that this is all behind us, how do you think about new products on the new platform that you guys -- have you got any permissions to start? A, what were we all waiting for because you had told at least the entire investor community in the previous call that we want [indiscernible] only in the new software. So which all were pending? And have you started getting some of them online? If you could talk through in terms of your efforts on that front, it will be really helpful.

Sure. One is this steel rebar contract. Permission is already there. But due to this delay in the CDP, the regulator has instructed us that you wait for until we say go ahead. Now that we have written to them, now that we have gone ahead with the CDP and 1 cycle of what the option expiries, future expiries and deliveries all have happened in the month of October. Now the second one all started, okay? And option crude has expired. I think today is the expiry and -- option has expired but futures will expire today, okay? 20th, crude reaches. And in the next 10 days, again, all the contracts will expire, and monthly contracts, of course. So it is the second month running. So we have already requested them, SEBI, to permit us to go ahead and launch all the contracts. I think we will soon expect a response from the regulator to really consent from them, then we will do that.

Got it. So that's the steel rebar contract?

Yes, steel rebar contract. The other one is the monthly options on bimonthly gold. So that is -- that we will -- again, they're all a part of that particular process. And we have applied for some more contracts also. And I think we will start doing it one by one, like, for example, DMA facilities, FIIs, FPIs were asking, that is something which we don't need to go to regulator. We already have it in the platform. We have not released it. We'll be releasing it maybe in a week or so. Similarly, Category II FPIs is also available within the existing system. And again, that also we will be releasing it. So these are all -- but yes. And for a new product launch, of course, it takes time in the sense after launch. Before we launch, we need to bring the stakeholders, apprise them of the contract specifications, et cetera, et cetera. So that work has already started, and we have already tied up, what you call, warehouses and other things for the steel rebar. Once...

Got it. Okay, okay. When you look at, Mr. Reddy, on the option side, how do we expand options pool now given that we have a bit more of leave it and look at new products because the CDP is launched. Option basket is a lot more of energy basket right now. Is this, in your view, can be changed over time if people accept certain kind of products? Or is it options inherently link themselves much better to energy? And that's the reason why we have a lot more energy contracts on the option side?

I don't say that it is primarily the energy only should lead it. I think Gold Mini is one, which we are looking at it where it's a monthly contract as well as the -- because underlying is monthly. At the same time, what you call, tenor is also monthly because the premium is dependent on the underlying one, underlying asset value as well as tenor. And the other main gold one is a bimonthly contract and is 1 kilo, whereas Gold Mini is 100 grams. So 1/10 of that value, so tenor is for 1 month. So coupled together, will give a boost to it. And I think in the month of October, we had almost all INR 800 crores ADT in Gold Mini. So that is something which we are looking at. And let's see. And even in other contracts, also gold -- other contracts also, we have seen some amount of, what you call, liquidity. And silver is another one, which is again picking up. Silver is doing also well. These are all the products which we are looking at activating them. But one thing which made both silver and -- both NG and crude options darling of the market is because the underlying has got a high, what you call, margins. And now crude has 40% and NG has got 30% as against the gold and silver. So that could be one reason why they are still holding on to it. But that doesn't mean that we should increase the margins in gold itself. That's not our intent anyway.

Of course. And when you look at, Mr. Reddy, the NG and crude volumes, they have been holding up very well on the option side. Is there any kind of event or potential risk that you see on those volumes, like the option volumes on energy basket from a underlying driver perspective? Is it being driven by purely volatility or is there anything more that we should learn about as we -- in our own estimates try to forecast the future volumes?

Yes. Definitely, volatility, you should pick up as one of the dominant factors when you are projecting it, no doubt about it. And the cash settling nature of the contract is also equally important...

Sorry, what nature, Mr. Reddy?

Cash...

Cash, okay.

Cash settling, okay? So that is another, so drives them. Maybe the third element could be that they are internationally referenced, okay, because they are CME -- linked to CME prices. So there could be arbitrage opportunities may be there. That's another thing which drives.

Got it. Got it. Got it. So there's no risk at least you guys foresee on these volumes that we have an option, at least to the extent that we can predict and forecast. In your view, the numbers that we have been doing are very good, there's no risk that you guys foresee, I would assume.

No, I'm not foreseeing any risk, okay? And now that competition is also open now and identical product, identical expiry dates, et cetera, et cetera. But still they notice -- we have not seen any traction. But then we should not be too cool about it. I think we should be on guard, which we are doing it. And thankfully, our technology platform probably -- maybe competition is expecting our technology platform to create some kind of disturbance in the trading, but by the grace of God that didn't happen. So we are very stable at this point. If you see the volumes in first 2 months, they're all in the same range. So we have not lost any volume.

Okay. Very good. And is the pricing very different, Mr. Reddy, in terms of what you charge for the same, let's say, crude or natural gas options, same expiry versus what, let's say, some of the competitors charge, like the people who launched it recently, the options contracts?

See, probably it didn't make any difference even if it was different. But I've not seen that. I mean I have not examined that part of it. So I'm not too sure what is this charge, what are they charging. You confirm to him, if you're sure about it.

See, they are not levying -- as of now, they are not levying any charges, nothing in case of NFC. Some symbolic charges are charged.

Got it. And still there are no volumes which are moving towards that side because there's probably no liquidity.

That's right.

Got it. Got it. Very helpful.

We have those statistics also of -- you can -- if you have it, you can speak up what are the ones which you are monitoring.

So currently -- just hold on. So NFC, I think on 17th November, if it is, the turnover is about INR 33 crores in crude oil options. And natural gas, there is no volumes out there.

And what is the premium, INR 1 crore...

Not even INR 1 crore, less than INR 1 crore.

Okay. Very good. Any other category, Mr. Praveen, where you think we -- NFC, if given a permission, could launch option [indiscernible] currently we have because we have the turnover a futures side to launch those option contracts, NFC may not. But do you think if they could get exception? Are there other categories they could launch, which are still missing in their basket?

Currently, despite, like if you go by -- strictly by that regulation, it is like there is a threshold, which is being stipulated that is INR 1,000 crores for -- but NFC could be able to launch it. They got the approval, and they went ahead. So that way, whatever contracts are there on MCX currently, it is there also got listed on NFC.

Only for crude and natural gas, right, or is it something else also?

All metals...

All metals...

Metals and [indiscernible].

Oh, I thought it is only for the energy basket. Got it. Okay. No that's very good validation that none of the commodities options, even despite big nonferrous, we haven't lost any volumes, that's very good. I think so next part on the option side, options -- the premium to turnover ratio, I think that kind of keeps moving around. Is it because of near to expiry options? And how should we think about as we become larger and larger today versus 1, 2, 3 years out? Is it [indiscernible] this number both? Or is it very much driven by that day and that month's volatility metrics and so on? So are you seeing a pattern, this now, Mr. Reddy?

See, as far as the tariff is concerned, INR 40 is minimum you get it. INR 40 per INR 1 lakh of premium. So that we are not going to revise it. Of course, there was some -- in the call that why don't you revise the options charges also. But maybe it is for me to look at that, let us settle down with whatever the problems that we have. Having said that, the volumes, I think the ratio will not fall below the, what is this, yes, it's 1.84%, okay, and premium on options, okay. Maybe for June quarter 1.97% because it's like an income tax slab, as I told you, it's up to INR 5 crores, it is INR 50. So if more and more people are falling in the second quarter, then the INR 50 impact will be -- will become trivial, in that sense, increasingly small. So INR 40 remains and that INR 40, if you calculate all the premium, then whatever is the percentage, it will remain like that. That's a main thing.

So it will -- that is the covenant and that number will not be very different than I would assume 1.84% that we have.

Even if you take 1.8%, that's the way it can happen.

Got it, got it. Very helpful. I think Nicolas, anything on the options side if you want to check.

Yes. Maybe just on that point, as we see the instruction of new multi tax contracts or options, in your -- I guess, in your view or in your experience, do you see certain quantities and certain -- depending on their nature of the contracts or like the speculators behind it, do they have different options, premiums or as well as open interest? Is there any difference between the commodities?

Yes. I think even in the case of -- options together account for about INR 21,000 crores of open interest on an average, generally speaking. And then features accounts for another INR 20,000 crore, INR 22,000 crores, INR 23,000 crores of open interest. So together, we have on the Exchange an open interest of INR 40,000 crores to INR 45,000 crores, it keeps varying it. And maybe a year ago, it was only INR 30,000 crores -- INR 29,000, 30,000 crores. So one is that interests in options has added more and more open interest. Then within that, the gold adds maximum open interest as against the crude. Maybe the -- again, these open interest figures are already there on the website. It's in the public domain anyway. So as it vary, I think in terms of volatility, it brings more ADT to crude and NG because, again, because of the cash settled nature of the contract. But when it comes to the gold, it adds more of what you call open interest. It also depends on the number of hedges who are participating in these commodities. So if the more number of hedges are participating in the underlying commodity, probably the -- with volatility, they will add more open interest.

Even if you look at international exchanges, the trend is different for different commodities because various factors will influence that ratios. So gold -- like, again, it is like gold is also a bimonthly contract. That is another part that you have to look at it. So like volatility, then the duration, then the strike intervals. So several factors, it like permutation combination of multiple factors that will lead to that ratio, that will determine the ratios.

On future side, Mr. Reddy, I thought I'd check 2 parts. I think bullion seems to be something that -- sorry, I think my understanding is bullion is not very high -- sorry, bullion is high in the portion of futures, and it has become even higher in first half of this year. Is that again because of any specific directionally reason, or is it because of the delivery requirements that come in base metals? That's first question. And I think, again, future side, on the mini contracts on nickel, et cetera, is that something that you think will happen on the base metal or nickel contracts because that is something that doesn't seem to have changed a lot of future ATO. So just what have been your observations on that front on the future side?

See, I will take the second question first, of course. The open interest in these, what we call, the metal contracts, it is reasonably good. In fact, it's been increasing, okay? Maybe barring 1 or 2 commodities, it has been increasing. And so that shows that more and more -- and we have seen correspondingly, the hedges participation is also increasing, okay? Maybe [Audio Gap] less, but still the participation is increasing. That's one important observation. Second, the mini contracts we have introduced for wherever the delivery and trading unit can be the same. So we have introduced for aluminum and lead and zinc. We have made an application to the regulators for copper as well as nickel and we are awaiting their approvals. So if we get those approvals, probably we will be able to launch that. And coming to the first question, in the case of bullion, the first half, it is high and then whether the second half, it could be low. I think -- my view is it's not referring -- with reference to any first half or second half kind of thing. The way that is working is that, the one is the volatility, which is contributing it, especially the silver has been having a high volatility, for which reason the turnovers are also very high in silver. You must have seen that, INR 7,000 crores, INR 8,000 crores as against gold which is INR 3,000 crores to INR 5,000 crores it is in the last 3, 4 months. And so we are also applying to SEBI, rather we are also seeking approval for some of these minis in the case of -- and options on some of these mini contracts also. So we will see once the necessary approvals are obtained from the regulators. So minis are really going to add. But we have not got that, the decision out of these mini contracts as yet. In fact, when we had lost them in 2019, almost [Audio Gap] of the turnover was coming from the minis. That is still not -- we have not reached that yet stage. So I think there's still a lot of room for us to get there.

Got it. Nicolas, anything on the future side that you want to check?

Nothing on the future specifically.

Mr. Reddy, when you look at -- you talked about your FIIs yesterday on the call, both in accordance for FIIs as well generally other participants, how are you seeing the participation given this transition is done? I'm talking more from the players who contribute volume, which is I don't think retail is that bigger segment for us for the future options. So people who contribute volumes, a, are you seeing them increase participation over time? Is it institutions, arbitrage players, mutual funds? How is the interest of FIIs now given this transition is done? And what is this -- I think you talked about in the call as well, the DMA facility, what does it mean? Like does it mean some incremental effort from their side? Or is it something that you guys have to create from your side?

No, that is direct market access is something which they want to have, trading terminal with themselves that they want to trade. That's the way it is. And I think while it goes through the system seamlessly, without much of interaction with the member broker is what the DMA facility is all about, but there are certain checks and balances as mandated by SEBI. So that is one thing that they're asking. And that facility is what they are looking out for. And in terms of FPI ADT, it is increasing day by day. And we have about -- registrations, almost all about 30 plus registrations have come so far in the FPI. So we -- I think we will -- that we are expecting it to grow and as we go along, almost all about INR 500 crores ADT they are contributing at this point in time. But that is too little. That is one part of it. But then there is also a lot of algo players, international algo players are taking our membership, some of them have taken also. They have not started because they are waiting for our new platform to be ready. And once the platform is there, then they thought of playing. I think now that it's behind us, and they will also join in terms of algos. Currently, algos are contributing almost all 45%, 50% -- 50% of the turnover. 5-0, yes. That's right. It's almost all that.

Rest 40% is domestic algos, right? 50%?

Domestic as well as the -- well, we call them domestic, but then there are also international players, who happen to seek registration.

Sure. Got it. And Mr. Reddy, an international player uses MCX, is it primarily for -- I mean thesis around financial -- they are not trying to hedge any commodity risk. They're simply doing this to make returns. So why are they generally choosing, let's say, an MCX, especially for FPI, where they could choose an LME or CME for doing a similar kind of trading. What kind of is an advantage for a sophisticated player to use an MCX as a platform?

Okay. One important reason is that they are only allowed in cash settle contract, not in the delivery-based contract. So the second part of it is that the arbitrage opportunities here may be different in the international market, or there could be between the 2 markets also where ever they are playing it, okay? And with this permission of FPI participating across markets, they are able to adjust even if there is a loss in one book, and there is a profit in another book, I think they are allowed to adjust now. Earlier, it was not the case. We'll be able to actively participate in that part of it. And again, calendar spread arbitrage opportunities may be also be there, which may not be there everywhere. That's another reason why. And again, our contracts are what we call rupee-denominated. Again, there could be another arbitrage opportunity.

Got it. Okay. This is very helpful.

Just quickly on the -- sorry, DMA facility. Do we -- this might be a basic question, do we get any additional income from that?

No, no. It's not -- it's just a facility that's all. There's no income. No income, no. At least, it's not fulfilling to that -- and I'm not too sure if others are charging or not.

Got it.

Initially you mentioned you will launch this next week, right, within a week or 10 days for getting into FPIs, the DMA facility?

We will announce. We will announce. I mean we will do...

Okay. I think I've nothing else on the revenue side. On index futures, I think we had this product, it is something that we still think we can focus on? Or is that something you think is not getting that much traction, Mr. Reddy?

See, I think BULLDEX is something which we -- which is doing at this point in time about INR 80 crores, INR 90 crores of ADT, but something which we have to ramp up. But more important is the METLDEX, which again was doing almost INR 300 crores ADT. That's gone because of the nickel debacle. Now we are reconstituting the index, and we removed the nickel from that. And we are going to relaunch this, and we will do that.

Got it. This is very helpful. I think just broadly on cost front, do you think in the coming -- I'm assuming that we have not talked about costs as yet, at least the new cost structure. Is that something that we should expect over the course of the next 1, 2 quarters to be discussed with the -- with us as an investor group that what kind of incremental cost that we will incur as we maintain the contract beyond the first year of maintenance-free period? And is there any kind of CapEx that we should be thinking about incurring on the basis as we have certain infrastructure, certain capital we had then to buy the -- beyond the software, the hardware, et cetera. So is there any color that you can provide right now, or do you think you'll be able to provide that over the next couple of quarters calls?

I think maybe after Q4, and around then we should be able to help you out. And by that time, many of the numbers will be there. And I think in this quarter, he has already booked many of the CDP -- after CDPs went live, we moved some working -- capital work in progress to put to use. So in this quarter, you will find that impact, maybe next quarter again, you will see some more items. And then I think by the end of '24, you'll see the end.

Nicolas, anything on the cost that you want to check, other cost items beyond this software costs?

Yes. I guess just generally now that the transition is over with the tech, are we looking at any other areas to, I guess, become more efficient in terms of costs going forward?

Yes. I think in the first year, we would be -- generally, we should be around INR 50 crores to INR 60 crores to 63 Moon. I think our IT expense would be in that range. So we'll have a larger -- there'll be a bump up in the amortization cost, then there will be some operating and application licenses that will be -- will have to come under the OpEx cost this quarter going forward.

And on people cost, Mr. Bolar, do you think people costs that we have right now, is it fairly sufficient in quarter number? Or do you think it could increase given the scope has increased for us as a team in terms of maintenance of this software part internally, part externally?

I don't think it will increase this, maybe 5% more or less kind of. It will not increase, that's it.

Great. I think one last thing from our side is, when you look at regulation, any kind of temporary risk -- risks or upside that you're either worried about if it is a risk, or if it is an upside in sales for that you think people don't discuss that much with you but that is one thing that you guys are really either ways kind of watching for positively or negatively, that you can talk about if that is something that can be discussed with investors.

I'm sorry, I didn't get you fully. You can...

I'll rephrase it. On regulation front -- Sorry, one second. On regulation front, do you think there's any upside that is not currently meaningful upside that you think can change the way, the volumes are currently either option or future side even, that you think is in the works, can be discussed with people like us as investors. It may take some time to determine the exact form or shape, but should be a meaningful addition to the volume numbers. And on the same side, do you see any similar risks that something may change on this specific regulation that could be a meaningful risk? Anything that you guys are aware of and can talk about.

I think maybe in all calls I have been saying that with regard to contribution to SGF, we have been requesting SEBI to consider how does the -- how do we calculate the stress test losses, almost all about 190-plus scenarios were considered by the exchanges before we arrive at the stress test losses. And then various other parameters are also there. So we have been testing them. And I mean, it's like -- we can't say that we will consider positively or negatively or anything of that kind or any dispute will come. But that's our ask. That's the way it is. And similarly, the mini contracts in copper and nickel, where we wanted exemption from being delivery unit and trading unit being identical. So again, if they permit us, then that's good. If they don't permit, because it's a regulatory dispensation, okay? Whether permit or not, I do not know. But that's -- these are all asks that are on table, that's it.

Got it. No, this is super helpful. Nicolas, anything else, any last questions that you have? Nicolas?

May be, the opposite of that, anything excited for in next few years in terms of the Exchange?

Thank you.