Multi Commodity Exchange of India - Lower turnover impacted operating performance - Q3FY21 - ICICI Securities

Positive developments for MCX include option pricing, but most of the growth optionalities (momentum in option pricing, introduction of cross-margin facilities for indices, incorporation of Indian commodity refiners, bank participation) remain on slow track. Near-term triggers would be reduction in crude margins further from 50% currently to ~25% while increasing the upfront margin regulations will be an overhang. In the medium term, it is likely that earnings will remain dependent largely on the volume of primary commodity futures.

- High margins (50% currently) remain an overhang on crude margins. The improvement in volumes post reduction in crude margin from 130% to 50% has been less than expected. While the management believes the reduction in margins from current 50-60% to ~25% would bring relief and boost crude volumes, some important considerations are as follows:

- Currently, there is a mismatch between volatility and margins on crude. While volatility is low, margins remains relatively high, which is a disincentive to traders.

- Since negative prices are now allowed in crude, the crude margins may not come back to original levels. Management indicated they expect the margins in crude to come back to ~25% finally, which will still be higher than previous base levels.

- Some of the lost crude volumes due to high margins have moved to LNG. As such, it is unlikely that there will be a complete recovery of volumes in crude if lower margins were to be restored. Some volume has already come back through LNG and some has come back due to already lower margins (130% to 50%). The volumes that can come back would be induced by reduction in crude margin from 50% to 20% depending upon when the regulator allows it.

- 9MFY21 crude ADTV was Rs26bn compared to Rs130bn in FY20. 9MFY21 LNG ADTV was Rs41bn compared to Rs15bn in FY20.

- Organic initiatives have led to higher volumes. MCX has increased Unique Client Codes (UCC) to 387k currently compared to 334k last year. New clients have contributed to 28% of the Q3 volumes. Additionally, 48% of the volumes have come from mobile platforms. As such, MCX has benefitted from the higher trading phenomena by new-generation internet users during the Covid lockdown as witnessed by equity exchanges too.

- MCX continues with the process of inducting Indian gold refiners' product in the exchange. Two Indian refiners have been identified and SEBI approval is awaited. Inclusion of Indian refiner products in MCX will result in better participation of Indian players in the bullion derivatives and higher prices might also encourage Indian refiners to list their products on the exchange.

- MCX is working on Indian lead refiners for incorporation of their product on the exchange. However, what could take longer is the incorporation of these products within the BIS (Bureau of Indian Standards) fold as suggested by SEBI.

- Bank participation is slow but picking up. Currently, six Indian banks are participating with a total ADTV of ~Rs3bn.

- Index volumes to be charged from 1st Apr'21: Currently, index volumes have crossed Rs3bn split between bullion/metal index reporting more than Rs2.7bn/Rs560mn in 9MFY21. MCX has applied to SEBI for cross-product lower margin provisions in case of index products. However, results are awaited. SEBI had rejected the application once in the past. Approval of this cross-margin facility can enhance volumes without increasing systemic risk in a certain way.

- Single Bullion Spot Exchange in Gift City: The IFSCA working group, in collaboration with all stakeholders, has decided that all Indian players will put up a single bullion spot exchange in the Gift City to be able to compete better with international players. India, being a high consumer of gold (25% of international volumes), should be able to take part in price discovery and volumes through this exchange.

- MCX has ~Rs160mn of MAT credit left.

- Renewal of contract for trading software in the final stages: The entire process is in final stages and the current vendor (63 Moons) is also participating.

- Options do not yet promise enough volumes for MCX to start charging. The total ADTV remains in the range of ~Rs8bn-9bn. Considering the charge will be on premium turnover and not on the notional turnover, the available revenue for MCX remains miniscule.

Shares of MULTI COMMODITY EXCHANGE OF INDIA LTD. was last trading in BSE at Rs.1673.4 as compared to the previous close of Rs. 1680.3. The total number of shares traded during the day was 19704 in over 1747 trades.

The stock hit an intraday high of Rs. 1692 and intraday low of 1663. The net turnover during the day was Rs. 33042496.

Source : Equity Bulls

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