MCX: Promising exchange

The Indian commodity market is growing. After a challenging last few years, the market is expanding now, thanks to the Securities and Exchange Board of India (SEBI) allowing subsidiaries of banks to become members of commodity exchanges, introduction of options – a low cost hedging tool and change in regulation that closed the option for companies dealing in precious metals to hedge outside India.

In the first 10 months of 2018, the total turnover recorded at MCX is ₹54.03 lakh crore, up 27 per cent from the same period last year.

Volumes and liquidity at the commodity exchanges in India may go up significantly over the next few years. The SEBI’s recent order mandating that listed companies disclose their commodity risks and hedging in their annual reports promises to bring more corporate participation in the commodities derivatives market. MCX — the largest commodity exchange in India (market share of 91 per cent) — is well-placed to benefit from the deepening of the commodity derivatives market.

Despite two equity bourses — the NSE and the BSE — starting gold and silver futures contract trading over the last month, MCX has been able to sustain volumes.

While the BSE has waived off transaction charges for a year in commodities derivatives, the NSE has waived off transaction charges for three months. MCX has not cut transaction charges and is confident of retaining market share.

Waiving off transaction charges alone can’t pull volumes. A proprietary trader or an algo investor who makes profits from buying/selling at small ticks, needs large volumes to make money. Currently, in bullion contracts, only MCX sees that kind of volumes.

Investors can buy the shares of MCX in the light of the recent regulatory changes. At the current market price of Rs 699, the stock discounts its estimated earnings for 2019-20 by 21 times, making it an attractive bet currently.

Business drivers

While the SEBI’s move to create universal exchanges by allowing equity exchanges to open trading in commodity derivatives raised concerns of market share loss for MCX, initial signals seem to indicate that liquidity may not move to new exchanges easily. The BSE launched its gold and silver futures contract this October. The average daily turnover (ADT) at the exchange’s gold futures contract is now ₹300 crore; at the NSE, it is ₹30-40 crore.

In MCX, the ADT in October in gold was ₹3,500 crore. Interestingly, this is higher than the average of ₹2,900 crore recorded at the exchange since the beginning of the year.

The increase in volume could be because of greater participation and widening of the client base. Axis Securities, the broking subsidiary of Axis Bank, has been offering trading in commodities futures contracts on MCX since August for its clients. SBI Cap Securities, HDFC Securities and ICICI Securities have also taken membership of MCX and are soon set to open commodities trading on MCX for their clients.

The exchange’s options contracts also seem to hold promise. While volumes here are miniscule at present, they may rise when many more institutional players participate. The SEBI is considering allowing MFs and PMS entities into the commodity derivatives market very soon ( some stakeholders indicate that it may happen as early as January 2019).

Given that options are a low-cost hedging tool, they may find more takers. MCX has not begun charging for options contracts; it will do so when volumes get to a critical mass with more participation — this may take three to six months.

Financials

The September quarter results met market expectation.

Operating income was up 6 per cent to ₹71 crore, Y-o-Y (in the half-year ended September 2018, operating income was up 14 per cent).

However, lower employee and technology expenses saw operating profits grow 10.9 per cent, Y-o-Y.

The operating profit margin for the quarter was 32.2 per cent, and expanded by two percentage points over the same quarter last year.

But compared to the June quarter, the margin was lower by 1.9 percentage points due to the cost of the LES (liquidity enhancement scheme on options) and higher licence fee paid to LME and CME.

The net profit for the quarter increased by 23 per cent, Y-o-Y, helped by lower depreciation and tax writebacks.

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