Multi Commodity Exchange of India Ltd

NSE:MCX

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Multi Commodity Exchange of India Q3 FY '19 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as of the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mrugank Paranjape, Managing Director and CEO. Thank you, and over to you sir.

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

Thank you, and thank you, everybody, for joining us on the call today. Wish you all a very, very happy new year. And greetings of the 2019 from our perspective come with what we believe was the best way to conclude the quarter that ended in terms of the turnover. So while we have mentioned this before, we at the exchange are extremely happy and excited by the fact that the ADT for the quarter ending December was at INR 26,614 crores, which represents the highest-ever turnover in a quarterly basis after the imposition of CTT. And as those of you who recollect, the imposition of CTT was probably the biggest downside impact in terms of the business that we've seen over the last 5, 10 years. So really very happy with the way our business has shaped up over the last quarter. I'll just run through some of the things that we've noticed, some highlights that we have seen. But with that -- and thereafter, we'll turn it over to questions. First and foremost, within this increase in the sort of turnover that we saw, the growth over the previous quarters in terms of number of contracts was driven by bullion and energy. And in term of -- in terms of turnover, it was again driven mainly by energy, but we did see a good impact in terms of gold, again, inching forward. So I think from our perspective, gold moving up by more than 10% over the last quarter was a really big positive. In addition to that, the open interest in our gold contract really continues in a very big way. So on the 1 kg contract, we crossed 18 metric tons. As of 9th, we were even ahead of 19.5. And as we speak today, I think we've crossed 20 metric tons. So if you see, over the last 2 quarters, we've gone from just below 8 to now over 20 metric tons, and that's a huge increase in terms of the open interest that we see. The second -- and this is not just -- I mean, I singled out bullion because it's probably the best example. But I think even in terms of our options contract, which are still, in terms of volume, slightly affecting contract, we don't report that number also in our turnover yet. But we have seen the highest open interest both in silver and in crude in terms of the option contracts as well. So that's a very positive development for us because the higher the open interest, it just tells you the more depth that's there in the contract and the market. The second thing, which we noted, and that's something that we were looking at the reason why turnover continues to show the positive that we've seen in this year over the last 3 quarters was that it is not just volatility which adds to the turnover but the fact that volatility is coupled with increasing participation. And when I say that, I know in terms of the unique client code that are registered with the exchange, there is a minor dip. But that dip is more because, as we have seen, a lot of our members are combining their equity and commodity memberships, and there are other consolidations happening. And during this process, there is a lot of weeding out of absolutely inactive UCCs, and this what has led to probably a small dip. But what we have noticed is that the actual traded clients in the exchange has significantly gone up in the last quarter as well. An indication of that is that in the financial years '17, '18, we had about 271,000 clients -- unique clients who had traded on the exchange. As we speak, in 9.5 months, we have almost tied that number already. So that's a phenomenal increase of more than 20% in terms of the number of clients who are trading on the exchange. And that widespread participation, we believe, is a direct result of the one pillar, which we have been speaking about on our previous calls, which is, in our opinion, now kicking in, in terms of the impact to the ADT, and that is the distribution angle. So as members are combining their equity and commodity arms, we are seeing those members really have a bigger uptick in their volumes, and that's something which was probably expected but also a little surprised, because the expectation was that members will save cost base and, therefore, become more efficient. But what we are also seeing is that by sheer combination of the sales force, members are now reaching out to a wider audience, and that's really increasing the participation in the commodity space. Secondly, while there has been slight delay in the onboarding of the bank subsidiaries in terms of going live, we do have 2 bank subsidiaries who are now live on the exchange, and we are very, very certain that 2 more will go live within this month, bringing that number to 4. But for the subsidiaries which have been live, their volumes are already showing pretty good numbers, and that's another reason why we think that the overall participation is going up. And that's a positive as well. I'll just spend a few minutes on some of the financial numbers because I think they're important in terms of what we've been speaking throughout this year and in terms of your understanding of our numbers going forward. So while revenue is pretty straightforward in our case to understand because it's a direct correlation to the turnover, I think something which we had mentioned before is on the treasury portfolio. As we speak, except for some portion of the tax-free bonds which we still hold, we now have absolutely no exposure to long-dated or long-tenor debt in our mutual fund portfolio. And that's helping us pretty well in terms of the returns that you are seeing on our treasury portfolio. So combined with a good turnover and a steady trading portfolio, I think the other thing which we wanted to reemphasize was that while there may be a minor increase in the costs for this quarter, there is about INR 4.5 crores of one-off costs which are very, very specific, which we have to take this quarter. And we are very confident, therefore, that in terms of the cost base will absolutely be within those numbers that we have been talking on all our calls until now, which is that, on an annual basis, while the variable cost will remain in line with the revenues, the fixed cost will not go up by more than 2% to 3% on a per annum basis. And that's the number which we are absolutely confident of delivering even for this year in spite of the one-off. The one-offs that we had this year -- this quarter was about INR 4.5 crores, roughly INR 2 crores legal expenses for certain specific things that we had either some old cases which we were closing out or certain matters which came up during this quarter. But these are very certainly one-off cases, and we will not have these expenses going forward. There's a INR 2 crores of regulatory expenses, which are one-off. These are because there has been an ongoing discussion on some of the expenses that we booked towards the IPF and ISF, which SEBI has opined that could not be booked to those funds. So while on an ongoing basis, there is going to be no impact, we had to take some reversals to the previous 2 years as well, and that's the INR 2 crores of one-off expense that we are talking about. In addition to that, we have a commitment to meet our goals under the CSR act -- CSR guidelines. And in that, our expenditure has been slightly lower than what is required as per the guidelines in -- under the company's act. So there was about a 50 lakhs of increase, which was more of an increase from a CSR perspective. That is probably something which will not be there in the next quarter as well. So I think INR 4 crores to INR 4.5 crores is a one-off expense which would explain why in the expense line, you would see under the other expenses the cost line has gone up. But with this and with the way we have been efficiently managing on the tax, again, because we have been making movements in our overall trading portfolio, we are very happy that this year's -- this quarter's PAT is a healthy INR 42 crores, INR 41.199 crores (sic) [ INR 41.99 crores ], to be precise. And that also is the highest PAT on a quarterly basis in the last 4 financial years. So I think those are some of the highlights in terms of the numbers. I think in terms of key expectation that we have over the next 3 to 6 months in terms of regulatory and other developments, first, we are now increasingly, I think, in a position to say that we feel confident that institutional investors will be allowed in this market during this quarter. Our confidence comes from the fact that these regulatory impediment from a custodian services basis, which was coming earlier, has been removed by SEBI in the last quarter in their board meeting. And that paves the path for institutional investors to really come into this market. So we remain absolutely confident that, that will happen this quarter. And the other development, which we expect in terms of expanding our product portfolio, is that we believe that SEBI will allow index-based products to be traded on the exchanges. To us, that's a very important development because index-based products, as you would be aware, if you look at the turnover in the equity markets, probably are the biggest portion of the entire turnover of the equities markets in the delivery space. And therefore, it's a product where we believe there is a good potential in India and also the fact that their cash-settled products will probably appeal more to people who are trading in commodities. Having said that, I think there is one change which we are undertaking currently on our product mix, which is to convert our metal contracts from cash-settled contracts to deliverable contracts. This will start in the month of March and continue over a period of 4 to 5 months. Again, this is something which has been asked to us. We believe that there is no reason for us to think that turnover will be significantly impacted in any ways. There will be some impact but not too big. And the reason to say that is that even if you look at bullion, which is a very similar contract, it is a physically settled contract, but it doesn't deter people from trading in that perspective. So those are the big changes that we think will happen over the next 2 or 3 quarters. With that, I think we are sort of done with our initial comments and happy to take questions from now on.

[Operator]

[Operator Instructions] The first question is from the line of Gautam Jain from GCJ Financial.

[Gautam Jain]

I just wanted to ask you. I just missed -- out of total expenses, other expenses, how much is the one-off during this quarter?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So about INR 4-plus crores is one-off.

[Gautam Jain]

Okay. That is including the legal and the other one, right?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

This mainly includes legal, regulatory and some portion of the CSR.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal Securities.

[Ashish Chopra, Research Analyst]

Mrugank, just wanted to understand from you. So firstly, in terms of the volumes that seem to be looking pretty impressive right now, you did spend some time articulating the impact of distribution and probably even the likely impact coming forward from bank subsidiaries. But would there -- would you be able to just peg on a ballpark as to how much of this volumes is actually coming in from the new trading members as a result of this distribution versus the fact that we've seen a lot of action on the prices as well on some of these key commodities traded on the exchange?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So Ashish, on the second point, first of all, what we have seen is that even if the underlying price of the commodity goes up, while positive movement in the commodity price does have an impact in terms of it being generally better for trading volumes, it is not necessarily related to the total value of the contract. And this is something which we are seeing because, at the end of day, if the contract size increases, finally, because people are actually trading with their margin money, and that's a finite amount of money that they have, volumes will actually just adjust themselves in terms of the lots that are traded. So underlying commodity price does not necessarily have a big impact except from a sentiment perspective of positive movements always being better for turnover. To your other question, I think what we are seeing as we analyze the data in terms of the members who are doing better in the previous quarter as compared to the second quarter, what we see is that those who have already combined their memberships and are working on a unified license are definitely doing better than those who continue to have separate memberships. So I think the rate of growth is definitely higher in the second category.

[Ashish Chopra, Research Analyst]

Okay. Okay. Got it. And would you be able to call out if there would have been any impact of the Liquidity Enhancement Scheme on the top line this quarter?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

Sure. So I think in terms of the LES, the number, just give me a second here. So for the quarter -- the previous quarter, for example, the quarter ended September '18, the LES amount was INR 1.67 crores versus for this quarter we just took a 44 lakhs in the revenue. So as you know, LES expense was being netted off from revenues earlier. So we already have a positive impact of INR 1.3 crores, INR 1.25 crores this quarter. And given that we don't have LES going forward, that's another 40 lakhs that will go out for the next quarter as well.

[Ashish Chopra, Research Analyst]

Right. Understood. And so going forward, what should be assumed to be the normalized tax rate after the changes that have happened in the way you've been now investing the excess cash? Should we expect it to be slightly lower than the earlier norms?

[Sanjay Wadhwa, Chief Financial Officer]

Yes. Ashish, it will be -- it will continue to be lower than the earlier norm. So for the -- at least for the next couple of years, I expect it to be in the range of 20% to 22% as against that 26%, 27% which was the rate last year.

[Ashish Chopra, Research Analyst]

Got it. And just one last question from my side. So on the options front, so would you say that we are seeing enough in terms of a pickup to now finally start charging? And I think, if I remember correctly, you had mentioned that next fiscal, we will definitely start monetizing the options as well.

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

Yes. So I would think so. I think we've probably stated that we believe that in terms of the time spent and the majority of the product, we are now looking to maybe the last quarter where we are not charging for options.

[Operator]

The next question is from the line of Dhwanil Desai from Turtle Capital.

[Dhwanil Desai, Founder]

[Audio Gap] one is, I think when you look at our realization, it's slightly on the lower side, would you attribute this to the much larger bank distributors coming onboard? Or has the product mix changed?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So I think it's clearly -- product mix change does not impact us in terms of realization because on our top 3 products, which do more than 95% of our revenues, it's the same charges that we have. So bullion, base metals and energy has the same charge sheet. The issue is, of course, as you rightly pointed out, that some of the larger members have grown faster than the other members with the result that the realization has dropped in the last quarter.

[Dhwanil Desai, Founder]

Okay. So as more and more larger players like bank subsidiaries come onboard, the likely trajectory may be much higher volume but slightly lower realization. Is that a fair way to look at this whole dynamics?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So I would say, yes, there will always be pressure on realization. Would it go down in the same manner? Difficult to predict. But yes, there will be some pressure on the realization as larger members keep coming in.

[Dhwanil Desai, Founder]

Okay. And my second question is on the options. I think first benchmark that we have in our mind is around 10% of the futures volume for the options all put together, and I think there's still some time away from that. So I mean, apart from creating awareness about it, is there anything specific that we are doing in that front to reach to the first goalpost that we have kind of put ourselves for?

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So I think in terms of reaching that goalpost, you're right in your assessment that we are still a little business away. Awareness is the biggest thing that we continue to do. There's some minor changes in the product that we are approaching SEBI for, but these are not really big charging changes. But yes, there are changes that we believe will allow more hedgers and especially option writers to come in. But this is something we have a dialogue with SEBI and may take a couple of months before it is implemented, which is in terms of changing some of the ways in this development has done today and some of the rules around in the money and out of money development. But those are the only specific things that we are trying to change in terms of the contract design. Other than that, at this point of time, the focus will continue to be in terms of increased awareness programs.

[Dhwanil Desai, Founder]

Okay. And last, a small bookkeeping question. So in terms of other income, I think we have had a significant jump. So -- and I assume that because of the yield changing, there is some mark-to-market gain. Is that a correct understanding?

[Sanjay Wadhwa, Chief Financial Officer]

Yes, absolutely. On our mutual fund portfolio, we've had a decent mark-to-market gain this quarter.

[Dhwanil Desai, Founder]

Okay, that's good. That question, that may be a one-off element in the other income, right? It may not be repeatable if the element is stable this year.

[Sanjay Wadhwa, Chief Financial Officer]

Not so. Since we have now consciously come out of long-duration products, there won't be much volatility even if the rates were to increase from here on.

[Operator]

The next question is from the line of Sameer Dalal from Natverlal & Sons.

[Sameer Dalal]

My question was around the same point, which was just discussed about the treasury gains. Can you quantify what was the profit which you got additional because of the yields coming off a bit? And can you also tell us what is the total cash that you have or additional funds that you have invested in the treasuries at the moment?

[Sanjay Wadhwa, Chief Financial Officer]

Yes. So if I just compare my pretax yield on my mutual fund portfolio, which was roughly 300 basis points higher than my YTM, which is what I would really call it as a one-off, the only arising on account of yield movements, on a INR 700 crore portfolio, that would be roughly around INR 2 crores. So that's the only kind of movement which is purely on account of yield changes.

[Sameer Dalal]

So you, at the moment, have INR 700 crores you are saying invested in the treasury?

[Sanjay Wadhwa, Chief Financial Officer]

In mutual funds.

[Sameer Dalal]

Okay. So we can talk of close to, even if we can generate -- say, even bringing it to 9%, you're talking of close to a INR 63 crore annualized profitability -- I mean, pretax profit for the treasury income. Would that be a fair assessment?

[Sanjay Wadhwa, Chief Financial Officer]

That's only on the mutual fund portfolio. Then we have a fixed deposit also and actually, one portfolio as well. And plus, we have funds at our clearing corporation. So all put together, we have roughly around INR 1,300 crores in the treasury.

[Sameer Dalal]

Okay. INR 1,300 crores, that's what I was trying to address. Okay. And that's part one. Now question #2 has to do around the fact that all the other exchanges are also launching commodities on their platforms, BSE, NSE and things like that. Do you see -- I mean, that's still very early days, and of course, you're still the market leader. There's, I mean, no competitor. Do you see any possibility of any volume shifting or any kind of negative impact coming to you through cutting off pricing a bit just to retain your current customer? Anything on that front just to get some -- what's your view on the fact that the other exchanges are getting into the commodity market.

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So I think we have mentioned this in our last call as well, but I'll reiterate that we believe that newer exchanges will, of course, expand the market. No question about that. But will it -- will they pull away volumes from existing contracts? We absolutely have our doubts. We don't think existing contracts will yield to any new exchanges. That's been the experience until now in the commodities market or in the exchange space. And therefore, I would sort of reiterate sort of that, that should be the experience going forward as well. And therefore, to your question in terms of market share, we have no doubt that we'll retain our market share in the product that we already have. To the extent that the newer exchanges come up with new products, absolutely, that is something which can expand in the overall market. But that, I think, in the long run, will benefit us. So in that sense, newer exchanges, if they get in new products, if they get in something which is different and innovative, obviously, the market will expand, and the pie will expand. But for the existing ones, we don't see too much of a pressure. And therefore, we haven't done any tinkering to our prices, and we don't intend to do anything at least for now.

[Operator]

[Operator Instructions] The next question is from the line of [ Tejas Sheth ] from Reliance Mutual Fund.

[Unknown Analyst]

Mrugank, I have just one question. In your opening remarks, you mentioned that the active members bidding has increased by 20% in this financial year. Is there any profiling done on this -- on new members? I mean, are these speculators? Or they are genuine hedgers on the SME side? I'm just trying to understand that how structural these members will be or if they are more of run by a mill kind of speculators.

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

So I think from an exchange perspective, anybody who trades is a valuable customer. And from our perspective, as much as a hedger adds to the open interest, anybody who creates adds to the turnover in the exchange. From the perspective of analyzing this, currently, the data points available to us are not really very strong. But very recently, SEBI has issued a guideline where we are now required to differentiate between value chain participants and the others in terms of how we look at their trading. And therefore, by about a year from now, when we put this mechanism in place, you will actually know how many people who are trading are from the value chain and how many people are financial traders. And I think that's when we will get a better feel of this number. But at this point of time, no, there's no direct profiling done of this client base.

[Operator]

Thank you very much. That was the last question in queue. I would now like to hand the conference back to Mr. Mrugank Paranjape for closing comments.

[Mrugank Madhukar Paranjape, MD, CEO & Executive Director]

Thank you again. And I think, as I said, we could have started 2019 on a better note with the way the quarter has gone by. I'll just take the next 2 minutes to just quickly reiterate what we've been saying as our messages and what continues to be our strategy. So one, in terms of the business, we remain focused on commodities. We do not have any intentions of looking at too many other divergence. Yes, we will be focused on getting a spot exchange going as and when the regulations allow for it. But within that, we'll stay focused in the commodities business. In the specific business that we have, again, we are working hard to make sure that we can expand the market, not necessarily only with new products but with existing products but better channels of distribution, more members and also with more participants coming in. I think in that sense, we will also be committed to what we have settled now. One, in terms of our cost base management, so again reiterating the message that we've said. What you saw this time was a one-off impact of about INR 4 crores plus that we explained. But on the cost base, other than those costs, which are revenue-related like the license fees and the -- and what we pay to our software vendor partners, all the other fixed costs, we will remain within the 2% to 3% per annum increase band that we have committed to all of you. So that should really -- and finally, as Sanjay also mentioned, that on the treasury, we have completely come off long-dated instruments in our mutual fund portfolio. And at the earliest, we should be able to do that even for the rest of the portfolio. So you should get a stable treasury portfolio, fairly predictable fixed costs. And therefore, every effort that we make to getting more revenue and volumes will translate into better profitability. With that, thank you, ladies and gentlemen, for joining on our call. And I look forward to catching up with some of you in person, but otherwise, with all of you at the next call. Thank you.

[Operator]

Thank you very much. On behalf of Multi Commodity Exchange of India Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.