Multi Commodity Exchange of India Ltd: Strong Brand Equity and Capital Position Should Help in Accelerating Growth

Summary

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• Strong capital and market position should continue to act as principal growth accelerators.
• Competitive strengths include strong brand equity and technological infrastructure.
• Blow of COVID-19 should be minimised due to adequate retained earnings and steps taken to reduce costs.

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Multi Commodity Exchange of India Ltd

Multi Commodity Exchange of India Limited is India’s first listed exchange. It is a state-of-the-art, commodity derivatives exchange facilitating online trading of commodity derivatives transactions, providing a platform for price discovery and risk management. It initiated operations in Nov 2003 and it operates under regulatory framework of Securities and Exchange Board of India. It offers trading in commodity derivative contracts across varied segments like bullion, industrial metals, energy and agricultural commodities, as also on indices constituted from these contracts. MCX is country’s first exchange to offer commodity options contracts, bullion index futures and base metals index futures contracts. 

Growth Enablers of Multi Commodity Exchange of India Ltd:

• Growth in ADT in Commodity Futures: For quarter to Dec 31, 2020, MCX’s total income saw 11% growth to INR125.67 crore from INR112.74 crore on year-over-year basis, with operating income exhibiting 7% growth to INR100.90 crore from INR94.11 crore in 3Q20. MCX saw its EBITDA grow by 17% to INR73.45 crore from INR62.67 crore over quarter to Dec 31, 2019. Net profit for 3Q increased by 29% to INR71.80 crore from INR55.57 crore over quarter to Dec 31, 2019. For 9M to Dec 2020, its total income was INR385.89 crore vis-à-vis INR368.00 crore during 9M to Dec 2019. Due to COVID-19, Indian Government declared nation-wide lockdown from Mar 25, 2020 onwards. Some essential services like commodity markets were allowed to operate as these were exempted from lockdown. MCX took some measures to restrict spread of infection to protect health of employees and make sure that business continues without any disruption. However, for period from Mar 30, 2020 to Apr 22, 2020, commodity market hours were restricted to 9 a.m.-5 p.m. Thereafter, from Apr 23, 2020, normal market hours i.e. from 9 a.m.-11.30 p.m. were restored. Operations, revenue and consequently profit during 3Q were not materially impacted because of COVlD-19. Management assessed potential impact of COVID-19 and it believes that its impact on operations of MCX and carrying value of assets and liabilities is not material.

• Increase in Market Share in Commodity Derivative: During FY20, the company saw strong performance. ADT of commodity futures contracts increased 26% to INR32,424 crore during FY20, as against INR25,648 crore in FY19. This was highest since imposition of commodity transaction tax. Average realization rate decreased to INR2.10 per lakh from INR2.17 per lakh on account of increase in ADT, leading to more member brokers falling under lower transaction slab. Total turnover of commodity futures traded on exchange was INR83.98 lakh crore in FY20 against INR65.91 lakh crore during FY19, a 27.40% growth. During FY20, the company’s market share in commodity derivative space increased to 94.01% against 91.60% in prior year. In terms of commodity futures contracts traded on exchange, volume saw 20% growth in FY20 to 295 million lots in comparison to 246 million lots traded in FY19.
• Rise in Turnover in Energy Contracts: In FY20, bullion futures turnover increased 93% to INR29.15 lakh crore. Bullion segment’s turnover of INR35,112.36 crore on Mar 16, 2020 was highest since CTT is introduced. Turnover in energy contracts increased to INR38,13,027 crore from INR24,50,777 crore in FY19. Agriculture futures turnover slipped marginally to INR1 lakh crore from INR1.01 lakh crore in FY19, principally because of drop in agriculture commodity prices. Number of agricultural futures contracts traded also fell from INR18,28,722 in FY19 to INR17,89,350 in FY20.
• Strong Position Should Continue to Lend Support: During FY20, MCX was a market leader in commodity derivatives among domestic exchanges, making up ~94.01% of total market share of commodity futures traded on Indian exchanges. This was despite increase in number of exchanges offering commodity derivatives for trading. As per data maintained by FIA, MCX was world’s 7th largest commodity futures exchange in 2019, by considering number of futures contracts traded.
• Transaction Fees Made Up ~73% of Exchange’s Revenue: MCX derives revenues from transaction fees, admission fees, annual subscription fees, terminal charges, connectivity income, interest income, dividends from and gains on sale of investments, and other miscellaneous income. During FY20, total income increased to INR48,177 lakh from INR38,472 lakh in FY19, exhibiting 25% growth. Net profit margin of 43% exhibits that it performed well during fiscal year. Operating expenses increased to INR22,514 lakh from INR20,575 lakh in FY19, a 9% growth. Profit before tax for FY20 increased to INR23,859 lakh vis-à-vis INR13,985 lakh in last financial year, exhibiting a rise of 71%. This company operates in single segment business. In FY20, transaction fees made up a significant portion of ~73% of exchange’s revenue. Revenue from transaction fee was INR35,303 lakh, against INR28,331 lakh in previous year. Investment of surplus funds were in assets including mutual funds, fixed deposits, perpetual bonds and tax-free bonds.

• Strong Capital and Liquidity Position Should Help Overcome COVID-19 Crisis: MCX has adequate capital and retained earnings and it does not expect to see any impact on capital and financial resources because of COVID-19 lockdown. It took various steps to reduce costs, which should be able to reduce blow on profitability. Retained earnings are being invested in MF instrument/Tax free Instruments/PSU bonds. Instruments are largely liquid and tax-free and PSU bonds are also traded in debt market. The company should not face any sort of liquidity issues. Apart from all these, the company stands in a debt free position.
• Strong Brand Equity- A Principal Differentiator: MCX continues to remain leading exchange in commodity derivatives arena, making up a market share of ~100% in case of options trading during FY20. It enjoys strong brand equity as it provides trustworthy trading platform for commodity derivatives through transparent price discovery and strong risk management processes. Prices discovered on MCX platform serve as a benchmark for trades in physical markets. It facilitates price discovery process in physical market. The company’s technological infrastructure builds on robust architecture that can cater to all market participants because of being fast, secure, cost-effective, transparent and regulated.
• Capitalising on Sectoral Opportunities: Favourable policy and regulatory environment, principally through permissibility of new products and participant categories have provided growth opportunities to MCX. Focused on bringing in measures for market expansion, regulator has taken steps during last financial year. These steps have potential for providing opportunities for MCX to bring more liquidity and depth into existing and new derivative products offered on exchange.

The company focuses to consolidate its position as leading exchange providing wide array of commodity derivatives, having focus on enhancing market size and expanding product and service offerings. It plans to constantly search for new product innovation and development. The company will continue to make efforts to cater opportunities unfolding in commodity market. The company invests in innovation and building in-house solutions to be agile and self-reliant to meet demands. It is adopting new technologies for applications and for enhanced analytics. It is strengthening technical capabilities to develop and support these platforms, maintaining correct balance of inhouse and outsourced talents.

Conclusion

Despite slowdown in economic activity, demand for commodities, especially industrial metals and energy products, should see some revival once there is proper commencement of industrial production, mining and supporting services activities. Given strong support measures dictated by government for industry, principally for MSMEs, demand for industrial metals should see some improvement.

While economic recovery was seen in India, stock of MCX saw a significant rally. Stock was up by ~65.001% over Mar 25, 2020 to Mar 25, 2021. An investor who would have invested INR1,00,000 on Mar 25, 2020, would have seen investment grow to INR1,65,000.6.

Continuous efforts to develop commodity derivatives market should open up many opportunities for the company, with expansion of product and permissible participant categories. SEBI allowed options on goods in Jan 2020 followed by required amendment to Securities Contracts (Regulation) Act, 1956. This provides an opportunity for the company to expand product basket by introducing options contracts on goods, meeting investment and risk management needs of new stakeholder groups. Spot exchange platform is an opportunity that the company plans to explore. Government has announced about setting up of international bullion exchange in GIFT-IFSC for trade by global investors. Mutual funds and portfolio managers started participating in commodity derivatives market. Banks’ broking subsidiaries initiated distributing commodity derivatives. Participation of these new categories should gain further attention in near to medium term. This should be able to attract new investors to this new asset class.  

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The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.