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Edited Transcript of MCX.NSE earnings conference call or presentation 15-Oct-19 1:00pm GMT

Q2 2020 Multi Commodity Exchange of India Ltd Earnings Call

Mumbai Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Multi Commodity Exchange of India Ltd earnings conference call or presentation Tuesday, October 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Padala Subbi Reddy

Multi Commodity Exchange of India Limited - MD, CEO & Additional Director

* Sanjay Wadhwa

Multi Commodity Exchange of India Limited - CFO

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Conference Call Participants

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* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Dhwanil Desai

Turtle Capital Investment Ltd - Founder

* Haresh Kapoor

IIFL Asset Management Limited - Assistant Analyst

* Hiten Jain

Invesco Asset Management (India) Private Limited - Research Analyst

* Hiten BorichaAnalyst;Joindre Capital

* Hitesh Kumar;Managing Partner; Aksa Capital

* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* Kunal Thanvi

Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst

* Nikhil Upadhyay;Analyst;Securities Investment Management

* Pranav Mehta

Valuequest Investment Advisors Private Limited - Senior Analyst

* Prashant Tiwari

SBICAP Securities Ltd., Research Division - Research Analyst

* Tianyuan Sun

Prusik Investment Management Llp - Investment Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the MCX Q2 FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectation of the company as on the date of this call. These statements are not guarantee 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. P.S. Reddy, Managing Director and Chief Executive Officer. Thank you. And over to you, Mr. Reddy.

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [2]

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Thank you. Good evening, everybody. Thank you for attending this conference call, Q2 call. The few highlights of this quarter I must share with you. This quarter is the highest performance we have recorded since levy of CTT. In the form of half yearly ADT, we surpassed INR 30,000 crore mark. Today -- I mean, rather for the first half year, we have about INR 35,055 crore ADT, average daily turnover. Similarly, the exchanges turnover has crossed INR 50,000 crore mark, making it -- making a 6-year high on 12 September 2019, which was about INR 50,179 crores. Similarly, MCX gold contract has witnessed a record delivery of 5.2 metric tons, valued at INR 1,821 crores, and this is the highest ever achieved in MCX. The open interest also recorded a 6-year high of 34.57 metric tons on 26 July 2019.

Similarly, we have crude oil, a lifetime high of INR 26,622 crores, the turnover we have achieved. And MCX cotton contract, which is our flagship agri contract, has a record delivery of 3.9 lakh bales delivered and which is almost all 119% surge over 1.8 lakh bales delivered during the previous cotton season.

So with these numbers, obviously, I don't have to tell you our financial results also look very bright. One, it's important to know that these numbers have been achieved despite, what you call, a lot of competition in the market, of course, and lot of efforts made by the competition in the form of various discounts offered for trading on the respective exchanges.

With this, I will ask Mr. Sanjay Wadhwa to speak about the numbers. And thereafter, we'll takeover on question and answers.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [3]

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Good evening, everybody. So due to a very good operating quarter, we've got some very good financial numbers. Our total income was up 55% as against corresponding quarter previous year. The operating income was up 41%. Our EBITDA margins have improved significantly to 100 -- by 103%. And our PAT margins, which stood at 50% for the quarter, are at 100% as compared to the corresponding quarter previous year.

So all in all, to sum up, I think, good volatility, supported by some very favorable yield movements and some good cost control has resulted in fantastic set of numbers. So now we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Kunal Thanvi from Banyan Tree Advisors.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [2]

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Congratulations on good set of numbers.

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Operator [3]

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Mr. Thanvi, can you speak closer to the handset, please? Your voice is not audible.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [4]

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Is it better now?

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Operator [5]

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Yes.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [6]

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Congratulation for the good set of numbers. So basically I had one question regarding our press release today, which mentioned Mr. Sanjay Wadhwa putting down his resignation. Can you throw some light on what would be the reason for the same?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [7]

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He just got better opportunity, nothing else. And he is a young man. And obviously, when he is young, he should earn more, that maybe the reason why he is moving on.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [8]

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Okay, sure. And one thing on the -- so I have been talking with some of the traders to understand how F&O really works in commodities. So one feedback that we received was the slippages in crude contracts are very high. Can you throw some light on that in terms of the price at which a trader wants to trade and the order actually gets traded, there is a slippage very high there. Can you throw some light on that?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [9]

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Well, I am not able to understand because no one has ever complained to us. And if the market is -- their touch line is so fast it is changing, that's a different matter. But I am not able to understand the question in what sense that a trader is not able to trade at the price that he wants.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [10]

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Okay, sure. We'll take this offline, maybe I'll help you all...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [11]

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Sure.

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Operator [12]

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The next question is from the line of Haresh Kapoor from IIFL.

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Haresh Kapoor, IIFL Asset Management Limited - Assistant Analyst [13]

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Sir, congrats on a good set of numbers. So just want to understand in terms of the outlook from the crude side on the volume front. So obviously, for Q2, you had, on the commodity future side, average of around INR 34,500 crore. Now just looking at the October number, obviously, you had a very good Q2, but though it's a very small sample set, just looking at commodity futures for the month of October, it kind of is at INR 28,300 crores on daily average. So just want to understand, do you believe Q2 was just pretty good in terms of gold volumes, et cetera? And -- or basically it's kind of fallen now. So just the momentum can be continued or was it more of a one-off kind of quarter or -- just want to get some color on the volume front from your end?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [14]

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Well, the two things that you -- we have to remember, one is that the first half of the year, our average ADT rather, is about INR 31,000-odd crores, INR 31,055 crores. So it is not just the Q -- of course, Q2 has contributed substantially, but Q1 also we did reasonably well, now this is one point. And if -- we are hopeful that this volatility continues this way, then we will be able to manage it -- we'll be able to maintain it. Now at this point in time, yes, these two are the major contracts, both gold and then crude, but once the cotton season starts, even that is expected to contribute. And we are expecting many more commodities to come into the basket of MCX, which we are expecting to trade actively. And of course, we are also planning to launch index futures and work is going on at full swing. Probably, we will be able to file our contract with SEBI for approval soon.

And apart from these things and FII participation is also -- not FII rather, custodian piece is going to be put in place sooner than later. And once that is put in place, maybe some of the mutual funds will start participating into this -- in this space. And with all these, and we are bullish about it, but notwithstanding the revenue part, we are more interested in controlling the cost, which is in our hands. And while the revenues can fluctuate, but then cost can always be controlled. That's what's our firm believes. That's why we have been able to achieve this kind of numbers. With the revenues increasing, our costs have not gone up, in fact, it has come down. That's the way it is.

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Haresh Kapoor, IIFL Asset Management Limited - Assistant Analyst [15]

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Sir, second thing just, I think you commented on the initial question, too, but regarding the resignation, just want to understand, does it have to do anything with the whistleblower letter as such that such a decision has been taken, or some color around why this has taken in with some of these events happening in the background?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [16]

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See, rumors thrive on questions. So the more questions we ask, the more rumors will thrive. My -- I am of a firm view that there is absolutely nothing of that kind on the part of Mr. Sanjay. And he is going in pursuance -- to pursue his other interests. In fact, he got a better offer than what we have been able to offer. That's the way it is.

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Haresh Kapoor, IIFL Asset Management Limited - Assistant Analyst [17]

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Okay. Sir, and just want you to remind, so on the cost front, right, obviously, you spoke about some initiative that you have taken in terms of controlling that side, but at the end of the year, how do you kind of look at the cost growth? And what could possibly be the margin targets or any color even if from a cost side that you could give will be pretty helpful?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [18]

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Well, we will not be able to give any targets as such, okay. What we are going to achieve or what we are going to -- what we are going to fix for the cost control. But it is our endeavor to control every bit of the cost that is -- that comes in our sight and see that our expenses are fully under control.

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Operator [19]

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We move to the next question, which is from the line of Hiten Boricha from Joindre Capital.

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Hiten BorichaAnalyst;Joindre Capital, [20]

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Sir, congratulations on very good set of numbers. I wanted to know the other income has gone up from year-on-year also and quarter-on-quarter. So how do you explain that?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [21]

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Yes. So other income, which primarily comprises of our treasury income, that has gone up because of some very good favorable yield movements, as I pointed out earlier. So we had some investments in some buckets and yields have moved very favorably for us. Even on our tax-free bond portfolio, we have got a very significant mark-to-market gain.

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Hiten BorichaAnalyst;Joindre Capital, [22]

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Okay. So is it fair to assume that a INR 30 crore run rate is the right run rate for the other income or -- because the other income has gone up significantly in this quarter, it has gone up by almost INR 14 crores, INR 15 crores.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [23]

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Yes. So we can't really -- I mean, you see, it all depends on yield movements. So if the yields stay where they are currently, I think, anywhere between INR 25 crores to INR 30 crores is a reasonable expectation. That's the way I look at it.

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Hiten BorichaAnalyst;Joindre Capital, [24]

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And sir, one more question. Your EBITDA margins ex of other income has gone up from 34% to 47%.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [25]

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Yes.

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Hiten BorichaAnalyst;Joindre Capital, [26]

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So what do you think, like, 47%, can this -- can more operating leverage play out as volumes increase?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [27]

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So what has happened this time is, as you know, our variable element of the cost is pretty small, okay? And fixed cost, we have been controlling very well, which gives us very good operating leverage. But what has happened this quarter is that even on the variable cost front, we have some reduced expenses on account of fee, which we earlier used to pay to LME has stopped because the metals contracts have become deliverable. So all these things put together has resulted in a good increase in the EBITDA margins.

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Hiten BorichaAnalyst;Joindre Capital, [28]

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Okay. And one more thing, the average daily turnover has been INR 34,000 crore what we have reported. This is mainly attributable to volume increase in the contract or value? How do we try to make sense of that?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [29]

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Yes, it's both. It's both. In some contracts, both have gone up.

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Operator [30]

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The next question is from the line of Kunal Shah from Edelweiss.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [31]

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Congratulations for good set of numbers. So firstly, in terms of the volatility, if we look at the volatility where it is, it's been over last one quarter and compare it when earlier we had this kind of volumes, and purely volumes not looking at the price increase, it seems like this time the movement in the overall trading volume has been much ahead of the volatility. So what could be the reason for that? Is it because of the investments made, and whether this would be much more sustainable because finally, volatility is still lower compared to FY '12 to FY '14? So just wanted to get the sense on that.

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [32]

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Well, volatility alone is not the reason, but volatility is the reason for more participation to come into the market. So the participants have substantially increased in all these contracts and that has brought in this additional turnover. Participation is...

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [33]

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No. Assuming that -- yes. So like, say, in gold contracts, if, say, volatility still continues to be somewhere around, say, 13% to 15-odd percent on, say, a 20-day average, while earlier when we look at it, say, in, '13, '14, it moved up, say, upwards of 25%, 30-odd percent, so that was quite high and at that time we touched a peak of, say, almost like INR 8,000-odd crores kind of average daily volume in gold. This time, actually, we are not seeing that, but obviously, the movement in the gold trading volume is quite huge. So maybe -- no doubt volatility drives the participation, but is there any other aspect, which is leading to there, either in terms of expansion or why more participants coming through?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [34]

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Yes. We do conduct on a one-to-one basis a lot of major -- the users in the -- for example, jewelers, okay? Major jewelers are being approached by our teams and marketing teams and one by one participating into this market. They are taking positions in this. So that is leading to a good growth in this. Similarly, we have also experienced this kind of thing in other contracts also. And I think these kind of awareness programs -- it's not just awareness programs, means like investor awareness programs, you call them for a meeting and then just gathering 20, 30 people and then give them (foreign language), no, that's not the case. Engaging on one-to-one basis is helping us to gain this ground.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [35]

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Okay. And so one is in terms of this and secondly, in terms of the variable cost, so say, the overall software charges, the major part of software charges was still variable. But this time, if we look at the increase, which has been there on a quarter-on-quarter basis, it's been hardly like 10-odd percent compared to 25% growth in revenue. So can you just give us the split in, say, the software between the variable and the fixed component?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [36]

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Which item are you looking at, if you can just tell me, then I can show you. In the results, if you're looking at...

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [37]

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Sir, the software support charges and the product license fee.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [38]

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Yes. It's a combination of two.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [39]

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And let's say combined and like computer -- yes, both put together, cumulative one.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [40]

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Yes. So there are 4 -- to be precise, there are 4 elements in that particular line item. One is the variable cost that we pay to 63 Moons, then there is fixed cost, which, again, is fixed, it -- that does not vary with the turnover at all, then there is a license fee that we'll pay to CME and LME, okay. So while the variable element of the software support charges has gone up in line with the increase in the transaction charges, the fixed has remained -- fixed -- technology expense has remained fixed. CME expense also is variable in nature, but the LME expense, as I told you earlier, has become nil for this quarter because all our contracts have now become deliverable, which is why...

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [41]

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Okay. And just with the quantum maybe what was LME fee -- license fee last time and what has become nil this time? And even in the variable, if you can just let us know in terms of earlier we used to have that -- when there was an agreement earlier, it was like, say, 10% of transaction fee plus something of the fixed. So now maybe if you just want to evaluate as to how it moves along with the volume or the transaction income, how should we maybe correlate that?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [42]

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So -- see, as far as the CME is concerned, it still holds good. So it has almost all touched the minimum whatever we have committed. When it comes to LME, it has not touched because we have terminated -- not terminated, I would not say that it is terminated, we are discussing with them that we will not be able to pay any longer this kind of fee, but we shouldn't be disclosing the -- because of the confidentiality clause in the agreement, we will not be able to give out what figure that we are actually paying out to them.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [43]

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Okay. But just the variable component in terms of as a proportion of the transaction fee which goes out?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [44]

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That's also a percentage to -- this one, no? So we will not be able to disclose that percentage. It's a part of the agreement, okay? The part of the transaction fee that we charge on those commodities for which we are fetching the prices from CE -- CME, so we will not be able to give that out.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [45]

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Okay. Sure. And thirdly, in terms of the overall tax, I think, whatever was going on with respect to few of the past assessment years, which is now in the contingent liability, have we heard anything about it? And do we see maybe if that will come through and could there be like INR 60 crores, INR 70 crores kind of outflow, which would be needed. So what is the update on that?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [46]

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So right now, all the assessment -- assessments rather are stayed because they are at various stages either in High Court or Supreme Court. So I mean, at least for the next few years, I don't see any movement at all.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [47]

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So in the near term, we are not seeing this liability to come through. It will still take much longer time, okay, even if it fructifies?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [48]

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Yes.

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Operator [49]

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The next question is from the line of Tian Sun from Prusik Investment Managers (sic) [Management].

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Tianyuan Sun, Prusik Investment Management Llp - Investment Analyst [50]

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Just 2 questions. Firstly, your point on momentum, are you seeing more trading from the existing members or kind of new members in participation or both?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [51]

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Yes, it's both. New members are participating, existing members also are active. In fact, some of the members who have -- we have done trading in the past, now they are coming back once again. That's also there. Revival of the old members are also coming.

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Tianyuan Sun, Prusik Investment Management Llp - Investment Analyst [52]

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Okay. And are you able to provide a time line for the index futures that you're looking to launch?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [53]

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Definitely in this financial year. But once we file it with SEBI, we do not know how much time they will take. So we will not be able to give any time line for that. But then that is where I am seeing only in this financial year. Whether it will happen in the current quarter or early next quarter, I will not be able to say exactly.

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Tianyuan Sun, Prusik Investment Management Llp - Investment Analyst [54]

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Okay. And in terms of the market potential here and how much revenue this could potentially add into your existing business, what are your thoughts on this?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [55]

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No, we never give out such forecast.

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Operator [56]

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

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [57]

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I have 3 questions. First one is on the base metal contract volume, I think post that, within deliverable, our volumes have dropped significantly. So -- and we have done similar things in gold and crude some time, some years ago. So what are we doing to kind of get that volume back? And/or is that a permanent loss of volume because of the speculators moving out of the market?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [58]

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Well, on the one hand, the loss has been a substantial loss. I do understand more than 35% of the loss that is caused. And secondly, the SEBI has also asked us to discontinue the Mini contracts. So that has also contributed for this loss. These are the two together that contributed.

Now while that is happening, we are also approaching a lot of base metal users, okay, especially, major industries, we are approaching them and where they can hedge their requirements on our exchange. SEBI has already mandated these listed companies to disclose how much of their -- the risk management are doing using these -- our hedging tools. And we have already scanned the available balance sheets of the companies and then approaching them as to who is doing, who is not doing. That's the kind of in-depth study we are doing, and then already our teams are on the street approaching these people asking them the advantage of doing hedging on MCX platform. It will take little more time, and we are also trying to push, or rather request the regulators to help us to ask these companies to make our hedge part of their requirements domestically because some of them are hedging in overseas markets. So we're also requesting them to hedge in domestic markets. So all these things will -- we are hopeful that will fructify and restore our market share. In fact, not just restore the lost quantities, it will grow further. That's what our belief is.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [59]

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Okay. So I mean from what the efforts that you're putting in, maybe -- it maybe at 6-month or a year from now that we maybe able to get back to earlier levels. Is that -- I mean, I understand you may not be having any concrete time line in mind, but is that a fair assumption to make?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [60]

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Well, we want it to happen even earlier, but then I don't know whether it will happen or not, but definitely.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [61]

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Okay, okay. Got it, got it. And sir, second question is on the participation, I think, on the two sides. So one is on the bank-based distributors. I think, we were running test batches for some of them and some of them had just onboarded when -- on the conference call we discussed from last quarter. So can you give some update on that? And also this custodian issue, I think you're saying that it's going to be resolved sooner than later. So I mean, if you can throw some more light as to when any time line around that, if can be defined, that will be very helpful?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [62]

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Yes. Coming back to the last question, the custodian part of it, it is something, which SEBI has to decide. But what we have thought and then shared with the industry is that today if a custodian has been given a license, he is supposed to be -- the custodian is supposed to be settling all trades in all commodities. Instead, we are suggesting a custodian may choose what commodities they are comfortable with and they can start the business with their mutual fund, which proposes to only trade in that particular stock. So we can make a small beginning in that wherever they are comfortable, these custodians, and wherever the mutual funds are interested in that particular product, they will be able to make a beginning. So they don't need to open up themselves to a big risk of maybe agri commodities or other commodities where they suspect there will be a major risk in getting into it. So this is one part of it.

The second thing which you asked is about the bank broking houses. They are very slow in responding to our calls in that sense and probably they are grappling with the existing equity markets requirements. And some of the events what happened in commodity exchanges also made them rethink as to why we should be venturing into these products, that could be one of their thinking process also. So we are -- we need to address all these concerns of these bank broking houses. We will be addressing them and it's slow, steady. And I am sure once they are -- they hook onto the platform, they will ramp up our business.

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Dhwanil Desai, Turtle Capital Investment Ltd - Founder [63]

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Sure. Sir, is it fair to assume that, that contribution to current volumes would be miniscule at that moment?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [64]

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Yes. That's right, that's right.

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Operator [65]

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The next question is from the line of Kunal Thanvi from Banyan Tree Advisors.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [66]

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So when you say these banks have to reevaluate whether they want to enter the commodity products or not, what does that exactly mean, can you help us understand?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [67]

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No, what I'm saying is the recent incidents in the commodity markets make them -- maybe some of them may get scared what happens to our capital or what happens to our margins, whether our investors will be secure, should we offer this kind of product to our investors. These kind of doubts are being raised. And although they have not got any bad this one -- bad experience in the commodity market as yet because they have not participated, but they are looking at what is happening around and then they are on a wait-and-watch mode rather than jumping into the commodity markets arena.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [68]

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Okay. And on index futures, I understand that we cannot talk about kind of contribution that could come in immediately. But on a broader basis, how do we look at index futures as a product for us? Like, can it be as big as, say, a gold or crude contract or maybe bigger than that?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [69]

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Well, I don't draw any comparison, but then all that I can say is it can be potentially a big contributor for our revenue growth. For the simple reason, they are going to be cash settled, and some of the institutional participants maybe looking at cash settled contracts. So that is the way it is -- it is our thought process currently.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [70]

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Makes sense. And when we were talking about increase in participation, you draw a point about educating the jewelers and stuff. How -- I was just wondering, does the banning of international hedging for bullion also helped us?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [71]

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Of course, it did.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [72]

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Yes. So that helped -- that was one of the biggest contributor in terms of increasing participation, right?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [73]

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Absolutely. Absolutely. But that helped to the extent that who are otherwise doing it in overseas markets. But there are some -- there are many who are not doing anything. So those people have also started participating in our domestic market. That's important.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [74]

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Those would be smaller jewelers, right, and...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [75]

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No, no, no. They're not small, they're not small. They are -- they have a pan-India branch network, so you can understand what kind of people are they.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [76]

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Got the point. That is interesting. And sir, on the base metal, you said that while to get to the earlier levels, it may take some time because of the various things that SEBI has asked to do. But on an incremental level, like, are we seeing some traction after the drop that we saw in last quarter? Are there any green shoots within the existing things that are -- that we are offering to our customers?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [77]

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My answer is not so much, but what we have -- what we plan to offer is not only these products, base metals, the variants of it also. There are so many variants within each of these products, these base metals. So that may also be useful for some of the industry participants who are looking for that kind of product for them to hedge. So base metal alone may not drive, but then aluminum variants maybe there or copper variants maybe there. If once we introduce, probably these volumes will go up.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [78]

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Okay. And typically, when we launch a contract, what would be the time period to achieve a scale, which is -- which starts making money for us?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [79]

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See, if it is already listed -- if it is already a listed product and then a variant is issued, probably it may earn revenues quicker than a brand-new product because that's the way it is. We recently launched KAPAS, and we are expecting -- already we are a market leader in cotton. So there is a great degree of correlation between the two. So probably some of the players would like to use them. And once the cotton season starts, maybe KAPAS will pick up in a great -- in a big way. That's what we're looking at. So similarly even in other metal -- in other metals also, if we start doing that kind of thing, variants are introduced, we will be able to see some traction.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [80]

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And in options, so we are still away from pricing them, right? We have not achieved the volumes that we wanted to price them?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [81]

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Yes. You are right. We are not able to achieve as yet the desired volume to price.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [82]

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Sure. And one more thing on the business overall on a very, very broad basis. So the very nature of our business is that we would benefit maximum when there is a lot of volatility in the commodity, right? So it is fair to assume that 1 or 2 quarters every year would be very volatile if the commodities are volatile and then there will be a linear growth. Just wanted to understand what could be that linear growth for the business if we just shy away from the commodity, from the volatility that these commodities see?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [83]

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Well, see, the way that I would like to position this MCX platform is that volatility, the word shows, it is -- itself does not lend great support, it's volatile, it's a fair-weather [find]. So we don't want to depend on it. That's where we want to introduce more and more products onto our platform and the growth should come from the -- from a variety of products than volatility in 1 or 2 commodities. So what is the linear growth? I am sure members will be able to -- I mean, participants will be able to make out what is the linear trend over the 3, 4 years, which is around -- how much is it, about 15%? How much? 8% to 10%?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [84]

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10% to 15%.

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [85]

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10% to 15% CAGR or something like that.

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Kunal Thanvi, Banyan Tree Advisors Pvt. Ltd - Equity Research Analyst [86]

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Okay. So one more question on the market...

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Operator [87]

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Mr. Thanvi, sorry, sir, request you to rejoin the queue, please, if you have any follow-up questions. (Operator Instructions) The next question is from the line of Prashant Tiwari from SBICAP Securities.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [88]

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So just continuing on Kunal's question, I want to hear your views on trajectory of ADT from here, like what will be the big triggers and what are big movers? So one you said there is already that the new products will come in. Can you point out 2, 3 more things that can help me or help us picturize a growth trajectory for next 5 to 10 years?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [89]

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You know it's a very long term, 5 to 10 years means for me. And I will not be able to say 5 to 10 years, but what we can look at is, as I said, we have also approached the regulators to ensure -- regulators to ask some of these major producers or the consumer companies to hedge their requirements on the Indian market, domestic exchanges than overseas. And trade in India should be our mission rather than trade elsewhere and when we have the robust platform. That's one major driver that can be as we go along.

The other thing that we are looking at is the institutional participation. Currently, they have not participated because of these -- the infrastructure constraints or, call it, the custodian piece not being there, et cetera. Once they join, obviously, there will be a big growth that will happen.

And third, and we are also expecting the WDRA to enable eNWRs in this nonagri commodities. So people can seamlessly, like they are trading in securities, they can also secure -- hold the DEMAT assets and they don't need to worry about the physical asset. So that is something which will give them a substantial degree of confidence and ease of trading also. So these are some of the things that I am looking for, what to call, fueling our growth.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [90]

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And earlier I think on one of the calls you mentioned that starting from October, exchanges will be sharing the hedges percentage in overall trading. So...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [91]

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As declared by the brokers and the clients. So we've been doing it. It's already there on their -- on our -- on their web -- on our website.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [92]

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So how will you identify who is a hedger, who is trading on the exchange and who...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [93]

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No, it is -- that's why I said, it's a self declaration. The investors will declare to the broker, broker in turn puts it on the website -- I mean, uploads it.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [94]

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So are there numbers that you can share right now or we can...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [95]

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It's there on the website. I have not taken the printout of that. It's there on the website. But then that's not complete because still brokers are giving. And as and when the new ones are joining, they're giving it. It's like that.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [96]

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Okay. And on the cash flow statement, there is a cash outflow of INR 180 crores and INR 20 crores for other financial assets. What is the nature of these, maybe Sanjay can answer?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [97]

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One minute, just a second.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [98]

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In the operating cash flow...

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [99]

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Yes. These are -- these major movements that you are seeing are primarily on account of the member margins. So they vary a lot and depending on the day, at the quarter end whatever the balance is, this gets reflected.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [100]

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So member margins is going out, okay, so whatever open positions are there.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [101]

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Yes. So if it is just ahead of the delivery period, we see substantial margins coming in for the payouts.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [102]

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So at the end of the quarter, this number should always give a cash outflow?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [103]

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Not necessarily. If it is coinciding with the delivery period, then we will see some huge margins at the closing period.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [104]

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Okay, okay. And in terms of KAPAS...

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Operator [105]

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(Operator Instructions) Mr. Tiwari, sorry to interrupt, sir. But if you have any follow-up questions, request you to rejoin the queue, please. The next question is from the line of Pranav Mehta from ValueQuest.

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Pranav Mehta, Valuequest Investment Advisors Private Limited - Senior Analyst [106]

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Congratulations for a good set of numbers. Just one bookkeeping question. Now with the corporate tax rates being cut, how will it change our sustainable tax rate going forward?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [107]

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So there are 2 benefits that came along very recently. One was the cut in the budget itself, wherein those companies in the range of INR 250 crores to INR 400 crores had a lower tax rate. And on top of it, we had another benefit, which came in from the new tax regime, which got announced. Unfortunately, we have some MAT credit lying with us, so we will not be able to take that second benefit, which came along immediately, but once we exhaust that MAT credit, we should be in a position to adopt the new tax rates.

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Pranav Mehta, Valuequest Investment Advisors Private Limited - Senior Analyst [108]

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Okay. So I think in the last call, you had said that tax rate should be around 20%, 22%, so that should continue, right?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [109]

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Yes, that should continue. You will see those kind of rates in this quarter also.

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Operator [110]

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The next question is from the line of Amit Chandra from HDFC Securities.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [111]

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Sir, as you have mentioned that the participation from the -- retail participation from banks is slow. So last time, we were very positive about it, so it has changed in a time of 1 quarter. But if I see the active UCC growth, it is pretty impressive, 6.2% quarter-on-quarter. And if I see the growth in number of terminals also, so I was assuming that the UCC is linked to retail participation thing. And if you could explain what has led to the rise in the UCC and what is driving this?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [112]

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As we said, the volatility is bringing back some of the customers we have earlier traded, but they now stopped trading, now they are coming back. And it's not the banks, which have contributed for this growth. If banks also got activated bank broking houses, this number would have been far better, okay? So it is substantially coming from the stockbroker DPs -- stockbrokers rather commodity brokers rather than from institutional brokers.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [113]

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Okay. And sir, also on the physical delivery side, so we have seen substantial jump in the physical deliveries. So if you can provide some number as in how much is physical delivery as a percent of total volume? And in terms of our operations, the back-end operations, how much we are capable to handle the physical delivery because now every -- the important contracts, which have traded, most of them are physical -- settled, and we are seeing increase in the physical delivery contracts. So what kind of risk we have in this? And at the back end, how much we are equipped to handle the physical delivery? And if the physical deliveries rise, then what kind of investments we have to make in improving our back-end warehouses and all those things?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [114]

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Well, see, we hardly pay anything to the warehouses because they charge the customers anyway. Of course, the billing process may be via the exchanges -- the clearing corporation. We simply designate a clearing corp -- a warehouse and then the payments are made by the people who are depositing and withdrawing the goods, et cetera. So there's -- we don't need to worry about it. But the most important thing is that even still we are a -- the question is, are we a financial exchange or are we a commodity exchange? And we are somewhere in between. We are not considering ourselves as a full-fledged commodity exchange where anybody will come and then start taking delivery for any commodity whenever they want it, that's not the kind of thing. So we don't have -- we are not going to increase our delivery centers beyond whatever is the demand from the major delivery centers. And that's what our view is and then that is good enough for meeting the requirements of the market. Now when it comes to the deliveries, yes, we have delivered about 24,971 metric tons metals -- base metals on the exchange platform in the first half of the year. And if you look at that, aluminum itself is 11,669 metric tons, copper 2,308 metric tons, lead is about 730 metric tons, nickel is 525, metric tons these are all, and zinc is 6,506 metric tons. And as I said, already, if variants of these metals are introduced, then automatically the basket will increase, the volumes will come back to these base metals. And we are doing that, we are working on that, it's work in progress and we will be able to arrest the fall in these base metal contracts, not only arrest the fall in the base metal contracts, but we will be able to increase the volume traded in base metals and the variants of it.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [115]

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Okay, sir. And sir, do you think that improving the physical delivery mechanism and investing in that can help improve the participation and -- like more and more corporates and more and more, like, traders and maybe will start participating and it can increase the depth in the market?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [116]

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See, one is to aspire that every (foreign language) should be or every warehouse should be a part of the MCX, this one. Second thing is to see that they're complying with the WDRA registration process, okay? For agri commodities that is the requirement. And for this nonagri, even the WDRA is also looking at framing the necessary guidelines. Once those guidelines come in place, then everybody has to necessarily register with WDRA so that there will be some accountability on the part of the warehouse service provider. This is one major thing. Second, we had recommended to SEBI also, and that is our ask, that the producer warehouses should also be -- producer, I repeat, producer warehouses should also be designated as delivery centers. So it is not for anybody to go and deposit it. If a producer has a futures contract, let us say he sold some 1,000 tons and if that 1,000 tons is allowed to be delivered from his own warehouse, the producers warehouse, to that extent, the cost will come down and they get encouraged to participate in this platform. So that is something, which is still -- is our ask, which is pending. It will take some more time probably and these kind of reforms will help in greater participation.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [117]

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Okay. And sir, lastly one more --

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Operator [118]

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(Operator Instructions) Mr. Chandra, sorry to interrupt, sir. But if you have any follow-up, request you to rejoin the queue, please. The next question is from the line of Nikhil Upadhyay from Securities Investment management.

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Nikhil Upadhyay;Analyst;Securities Investment Management, [119]

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Sir, one -- sir, basically, 2 questions. One is, sir, on the spot exchanges on the gas and the gold exchanges, where are we and how much time do you think we should -- it would require? And where is the regulation and the process is in terms of the product? Secondly, sir, in terms of any new product launch, we have to go to the SEBI to get the approval and launch the product. So is there a thought process in terms of the regulator itself thinking of streamlining the process rather than going for every approval? And connecting to that, how do we measure the efficiency of our sales team once a new product has been launched in terms of -- so as an investor if I have to understand once a product is launched, how do we measure the efficiency of that product in terms of our sales team efficiency?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [120]

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In terms of...

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Nikhil Upadhyay;Analyst;Securities Investment Management, [121]

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In terms of how our sales team is efficiently able to increase the breadth of that product or how do we measure the sales efficiency as such?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [122]

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Okay. See, before we launch any product, we have, what is called, a product advisory committee, okay? And which consists of the participants from the physical market, producers, traders and they are all from physical markets, by the way, and some of the stockbrokers, et cetera. So they know (foreign language), that's the way it is. So they guide us how do we go design the contract and from there it starts, and then we take a buy-in from those people also. Obviously, you are recommending, means it must be working well and they guide us how to go about marketing it. So it is at that stage it starts. And then we file that post -- if necessary, approval has been filed with SEBI and this is a process, which SEBI has to look at it, whether there can be any further streamlining can be done, but we have not found anything what -- any difficulty in getting deliverable contracts cleared by SEBI, that's not an issue at all. So this is one part of it. And how do we measure it? Well, we -- there are various ways of popularize -- various ways of taking this product to the different stakeholders is in place and the sales team is given, what you call, key result areas in the form of ADT for each commodity, okay. They're supposed to be achieving by this time so much of ADT. So they know how to go about doing and approaching this, and that's how we are achieving it.

On the gold spot exchange, essentially the gold spot exchange is for the local bullion refiners. That's gold to be marketed and then including the refiners who use the scrap material and then scrap gold and doré, they call it, and mark -- and bring it back into the mainstream. So that is where India gold standard was proposed and it is with the government. They have to first notify and then identify a regulator, who will be enforcing that India good delivery -- India gold standard rather. That's what is we are expecting. Post that, then there will be a regulation to be framed, identifying a regulator who will be regulating the spot exchanges. Currently, that's also not in place. Once all these things are in place, then we will be able to file our application for trading markets. But parallelly, our development is going on. That's the way it is.

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Nikhil Upadhyay;Analyst;Securities Investment Management, [123]

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Okay. Just one thing, sir, you also mentioned that some of the bank brokers are at least looking at whether they should be like giving the product commodity to their customers and also is it basically, do they have question with respect to platform? It's like, are they looking at that probably you can do it with NCDEX or anything because...

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [124]

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Absolutely, absolutely. What are we seeing is, it's all an immediate reaction, whatever that has happened in the market recently, that is what is some of them saying that we will wait and watch for some more time. That's the way it is.

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Nikhil Upadhyay;Analyst;Securities Investment Management, [125]

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So how are we addressing these concerns, sir?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [126]

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Well, we can only say that our platform is good and whatever the risk management systems that we have, we can make a presentation, et cetera, et cetera. But then still the call has to be taken by them, isn't it?

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Operator [127]

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We take the next question, which is from the line of Hiten Jain from Invesco.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [128]

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Sanjay, in the financials, we report this line item, software support charges and product license fees. So this actually has 10% of the revenue and plus the CME and LME license fees as per as my understanding. So you said on an earlier question that you no longer have to pay LME fees. So is that the only change? And if yes, then why so? I mean, I didn't understand the rationale behind LMA expense going away?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [129]

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Yes. So your first question, that's the only change. LME has gone away because we are no longer using LME prices for our settlement delivery rates. So I mean, the contracts have become delivery now wherein now we poll the prices and that's how the deliveries happen. So we no longer use LME prices.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [130]

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So then what is the CME price used for?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [131]

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Crude natural gas.

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [132]

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And copper.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [133]

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Okay. So for -- so the contracts which are to be delivered, you no longer need a product for that license?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [134]

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Correct.

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Hiten Jain, Invesco Asset Management (India) Private Limited - Research Analyst [135]

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All right, all right, all right. Yes, that's clear. And it has been great interacting with you, Sanjay, over the last few years and wish you great -- best wishes for your next endeavor.

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [136]

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Thanks, Hiten.

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Operator [137]

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We take the next question, which is from the line of the Hitesh Kumar from Aksa Capital.

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Hitesh Kumar;Managing Partner; Aksa Capital, [138]

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I am just trying to look at your operating revenue as a percentage of the total value of contracts traded and there we see that the fee has declined from 0.45 basis points to 0.43 basis points in the quarter. Could you just help us understand what brings this or what is the variable part in this particular fee, and if your pricing is different on different commodities?

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Sanjay Wadhwa, Multi Commodity Exchange of India Limited - CFO [139]

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So the price is -- across the board it's the same except for very few commodities where it is little lower. If you see my transaction revenue, more or less corresponds with the growth in the ADT except for the drop in realization. So obviously when the volumes go up, the share of these larger brokers also go up a little and correspondingly there is a little bit of a realization drop which comes in. So that is the only difference, that is because of the slab. We have a 2-slab structure, so if the larger broker, who is doing above INR 350 crores, contributes more to the ADT, then our realization accordingly drops to that extent. So that's the only difference, otherwise you will see that the operating revenue is very much in sync with the growth in the ADT.

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Hitesh Kumar;Managing Partner; Aksa Capital, [140]

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Got it, got it. And my second question is, what gives you confidence that the institutional participation will increase if the infrastructure issues are addressed, that and also your confidence that the index futures will probably bring in more participation and drive volumes?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [141]

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Well, we are receiving the -- rather we are closely working with some of the big mutual funds, okay, and on these fees -- custodian fees, and that gives us confidence that they will participate aggressively.

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Hitesh Kumar;Managing Partner; Aksa Capital, [142]

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And how about the index futures, in the sense, if you can just probably give some color as to what kind of these index futures that you're thinking of and launching in the system?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [143]

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Yes. We have iCOMDEX, which is a composite index, and we have a bullion index and then base metal indices. And the work is on, in fact a substantial work has been completed. Probably we may be able to transmit the indices on our trading system, maybe next week or week after next week live. And the data will also be available for some of the players for them to build their own strategies and then their own models for trading on these index futures so forth. So let's see because engagement with the most of the players is going on and one round of sessions has happened in Bombay, Delhi, Calcutta and Madras, and we have incorporated their positions, and again another select set of some players, which are major players is happening this week, and thereafter we will be doing this. We are confident that we'll be successful in this.

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Hitesh Kumar;Managing Partner; Aksa Capital, [144]

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Sure. Got it. And your pricing would be the same, right, I mean, whatever pricing that you have on the existing commodity products, it would be same or would it be lower, given that these would be probably index contracts and hence the value might be on the higher side?

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [145]

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Well, we have not decided as yet and let's see because we're -- anyway, for first 3 months, we will be -- there is an introductory offer kind of thing, so thereafter we will decide what price to be tagged.

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Operator [146]

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The next question is from the line -- ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Reddy for closing comments.

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Padala Subbi Reddy, Multi Commodity Exchange of India Limited - MD, CEO & Additional Director [147]

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Okay. Thank you everybody, and so hope that next quarter will be still better. All the best.

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Operator [148]

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