MCX India Ltd: Updates

I am getting queries regarding the future growth prospectus of MCX in the back drop of falling business and the fear of competition from the likes of NSE and BSE in the commodity exchange business after SEBI has approved the uniform exchange concept in India.

Today MCX has given muted set of numbers with top-line declined to 61 cr from 69 cr and PBT at 26 cr from 46 cr. However if we remove the impact of higher other income from last year’s results then PBT will be at 11 cr vs 14 cr last year and it starts to look much better in the difficult times. I think muted results are on expected lines; high growth in equity market has resulted in low volumes at commodity exchanges, Low commodity prices like Gold and low volatility, China's demand for commodity is low (means low volatility) so arbitrage opportunities are low in Indian commodity exchanges which generally are not doing much for actual price discovery in India. India is not a price setter for most of the commodities even where it is the global leader in production. We are just a price taker mainly because of low volumes at our commodity exchanges. Very few producers turn up to Indian exchanges for hedging. MCX has also launched option trading in Gold. Options are cheaper to trade so it is also possible that this might be (but not sure) one of the reasons for decline in top-line although in the long term option trading will grow the volumes big time.

But I think market was aware of the same, that’s why the price of MCX had fallen to 930 from 1200 levels in recent times.

But I am not investing in MCX for more growth in “these” factors (except options)….these are for big analysts. But just let me tell you the status of our commodity market; our commodity futures market is just 7% of equity futures turnover compared with 60% in USA and 110% for most of Asia like China, Japan. 

Most of the market in commodity trading is in the hands of Dabba traders. Daily Commodity turnover is around 20000 cr but unorganized daily Dabba trading in commodity is much more than 1 lac cr. CTT (the master stroke by our Govt) has resulted in shifting of even more trading to Dabba. Trading volumes at MCX after the introduction of CTT are still at some 30-40% of peak volume. This difference trading has not stopped but shifted to Dabba.

Barring few commodities like Gold, Crude Oil, silver nothing trades due to very low volume. No serious price discovery takes place at Indian exchanges, people just try to take benefit of arbitrage due to mismatch between global and Indian prices. Agriculture commodity trading is even lower…I think it is effectively non-existent. 

So for me, growth in these factors is the main catalyst. We’ll see more trading in Commodities, real price discovery, growth in Agriculture trading (Although the same is not the forte of MCX yet), shifting of Dabba trading to organized trading because the new regulator SEBI is much more powerful than earlier one, FMC (SEBI has penal powers of raid, search, fine and to take actions against criminals). Downward trend in commodities world over is also showing signs of revival. Any action related to abolition of CTT will be a big factor in volume growth. Also, CTT impact is very low for options as compared to futures as transaction value in case of options is very low at just premium paid and so the same will spurt the growth in volumes.
Equity markets are at high and may cool a bit and may not offer that high returns which it did last year. So investors will shift to commodity market and volume will pick up. But i am not betting on these trivial factors because scope of scale is way bigger than the current scale.  

SEBI has taken some major long term steps like Option trading and allowing players like banks, Mutual funds to trade in commodity exchanges. These steps will pave the way for long term growth in commodity trading.

So for me, the commodity trading is yet to be started in India. Current state is just an illusion and does not warrant any attention for quarterly type of things. So in my view, it is just wait and watch on policy and other fronts for another 2-3 quarters…no need to panic. As most of us are already invested but after some time more investment can be made in MCX (My Avg is 1050).

On the issue of impact of uniform exchange on MCX business by NSE and BSE, I think MCX can battle it out. Moreover this is not the first time the fight is being fought. NSE is already the biggest investor in NCDEX and it has tried everything to capture the volumes from MCX for non-agri commodities but it has failed miserably so far. Even during the times of NSEL fiasco, NCDEX couldn’t dent any meaningful breach in commodity trading. BSE is also trying hard to taste success in F&O for years by offering low charges although it worked for a while but eventually BSE had to stop bleeding money (although I am positive on the future of BSE and it is one of major investment). Networking effects play big role in exchange business and it is not easy to capture the volumes from rival exchanges by offering low costs. Volumes are the big factor. However, even MCX can enter equity trading on the same lines which it always wanted. BSE and NSE can try to capture volumes by offering low prices but MCX can lower its prices too. 

Moreover the fight between these three should not be seen as the one for getting the bigger piece of the pie because the size of Pie at present is very small which means that there can be a case that all three may end at having big piece when the size of the pie will grow big. So just watch the game.

Further I am yet to check what will happen to the earlier SEBI norm of maximum of 15% shareholding in a commodity exchange by a single entity. Whether the same will applicable on NSE and BSE also? I am yet to check this one. I also feel that consolidation will take place in Indian commodity exchange scene and smaller ones may choose to drop their guns. So Kotak may choose to back out from MCX as they are shouting ever since that their investment in MCX was just financial. So it is better if weak hands stay out and some bigger and serious player will come and take the game head on.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).