MCX : Poised For A Big Leap Ahead
India is one of the world’s leading producers or consumers of various commodities. The initiatives undertaken by SEBI have the potential to catapult the Indian commodity derivatives market into the league of the most influential markets on the global map. And that is why Multi Commodity Exchange of India Limited (MCX) is all set to post a high score
Multi Commodity Exchange of India Limited (MCX) is India’s first listed exchange, a state-ofthe- art commodity derivatives exchange which facilitates online trading of commodity derivatives transactions, thereby making available a platform for price discovery and risk management. The exchange started operations in November 2003 and operates under the regulatory framework of the Securities and Exchange Board of India (SEBI). The last two decades have seen extraordinary change in the way we live our lives and in the role of technology in shaping our world. MCX has been a part of this unfolding story from the start.
It is an independent Indian government-owned commodity exchange based in India. MCX makes its way under the ownership of Ministry of Finance, Government of India. The average daily turnover of commodity futures contracts increased by 26 per cent to Rs 32,424 crore during FY 2019-20 as against Rs 25,648 crore in FY 2018-19. The total turnover of commodity futures traded on the exchange stood at Rs 83.98 lakh crore in FY 2019-20. MCX offers options trading in gold and futures trading in nonferrous metals, bullion, energy and a number of agricultural commodities such as mentha oil, cardamom, crude palm oil, cotton and others.
Commodity Derivative Market
Commodity derivatives are important for all major businesses and corporates to manage price risks. This contributes towards enhancing the market competitiveness of an economy and is therefore an important pillar in the financial landscape of any major economy. India is one of the world’s leading producers or consumers of various commodities. The initiatives undertaken by SEBI have the potential to catapult the Indian commodity derivatives market into the league of the most influential markets on the global map. Commodities witnessed a turbulent 2020. Gold reached new all-time highs while the cyclical markets hit deep crisis troughs from which they are still recovering.
Nearly all commodity prices rose in Q1CY21, continuing the marked rebound since mid-2020. Further, almost all commodity prices are beyond their pre-pandemic levels and those of some commodities, notably metals, are well above their previous levels—copper prices were nearly 50 per cent higher in March 2021 relative to the end of 2019. The recovery can be traced on the back of the improving global economic outlook, aided by significant monetary and fiscal stimulus in advanced economies and steady, although uneven, vaccination rates. In recent times, the tiff over oil production and China’s new policy on base metals were some of the factors that impacted the commodity markets across the globe.
Financial Overview
Multi Commodity Exchange of India (MCX) reported a 41.31 per cent decline in its consolidated net profit at Rs 38.44 crore during the March quarter as compared to Rs 65.50 crore in the same quarter the previous fiscal. The company’s net income declined on a consolidated basis to Rs 108.46 crore from Rs 134.94 crore on a year-on-year basis. Expenses remained lower at Rs 58.92 crore as against Rs 70.32 crore in that period. The company’s board recommended a final dividend of Rs 27.70 per equity share for the 2020-21 fiscal. On an annual basis, the total income from operations went from Rs 37,044 crore in FY20 to Rs 34, 485 in FY21, a decrease of 6.9 per cent. The total income for FY21 stood at Rs 45,542 crore as compared to Rs 48,177 crore reported in FY20. The net profit also showed a declining path and reached Rs 18,782 crore in FY21 from Rs 20,852 crore in FY20.
MCX reported that its average daily turnover in commodity futures, including index futures, on the exchange decreased by 13 per cent to Rs 31,823 crore in the fourth quarter of the 2020-2021 fiscal from Rs 36,626 crore in the same quarter the previous year. With the pandemic continuing to keep the world in its grip, there has been a major impact on not just human life but also the business and financial markets. A footnote by the exchange explains that the management foresees that impact of pandemic on the operations of the company and carrying value of its assets and liabilities is minimal. The market share of MCX was 95.04 per cent in the 2020-21 fiscal.
The financial ratios of the company exhibited robust growth. The EBITDA margin improved from 28.80 in FY19 to 39.22 in FY20. The EBIT margin improved from 46.88 to 64.46 in FY20 and the pre-tax margin expanded from 46.87 in FY19 to 64.41 in FY20. The PAT margin stood at 45.75 in FY19 whereas in FY20 it was recorded at 56.29. The valuation ratios for the company also delighted investors in FY20. The PE ratio lowered from 30.14 in FY19 to 27.65 in FY20. EV and EBITDA chose to remain almost similar to FY19 and touched 22.4 in FY20 whereas it was 22.78 in FY20. The cash flow ratios had a cheerful story to tell as well. The free cash flow per share turned positive at 56.06 in FY20 as against negative 10.39 in FY19.
Threats and Risks
Following are some of the potential risks and threats to the company:
• Competition: The permission of commodity trading on all exchanges which are well-established in other market segment has led to MCX facing competition from new players. MCX plans to challenge the competition by continuously improving its products, technology and processes. Its strategy includes introducing new products, sustaining investor awareness activities and having a customer-focused approach.
• Cyber Security Threats : MCX being a financial market infrastructure setup, cyber security is of the greatest importance for ensuing trust among the market participants, regulators and other stakeholders. As cyber attacks are becoming more sophisticated, MCX is continuously evaluating and implementing various security solutions for early identification, detection, quick protection, response and recovery from all such attacks.
• Loss of First Mover Advantage: It is possible that MCX is not always the first among domestic exchanges to launch a new product permitted in the commodity derivatives market, which can lead to loss of the first mover advantage. However, the company strives hard to be the first one as it provides a natural edge in garnering trading interest and liquidity from potential participants.
Outlook
Recently, MCX has signed a MoU with Europe’s EEX, a leading energy exchange, with the objective of knowledge-sharing and exchanging of expertise on electricity derivative products. This MoU will play the role of facilitating cooperation between the two exchanges in areas such as knowledge-sharing, education and training along with organising events in the domain of electricity derivatives. Moreover, such cooperation qualifies as a crucial element for the overall growth and development of the commodity markets, identifying the dynamic nature of global markets. MCX offers the benefits of fair price discovery and price risk management to the Indian commodity market ecosystem. MCX has also forged strategic alliances with various international exchanges as well as Indian and international trade associations.
Promoters held zero per cent stake in the company as of March 31, 2021 while foreign institutional investors (FIIs) held 39.4 per cent and domestic institutional investors (DIIs) held 38 per cent. The public and others held 22.6 per cent stake in the company. Following are some of the competitive strengths that the company bears:
• Strong Brand Equity: MCX enjoys strong brand equity since it provides a reliable trading platform for commodity derivatives through transparent price discovery and robust risk management processes. The prices discovered on MCX platform serve as a benchmark for trades in physical markets, thereby facilitating the price discovery process in the physical market.
• High Standards of Corporate Governance: MCX is committed to strong and effective internal governance and regulation. It believes that regulatory integrity benefits investors and also attracts market participants to trade on the exchange platform.
• Technology as Differentiator: The company’s technological infrastructure is built on robust architecture which has the capacity to cater to all market participants by virtue of being fast, secure, cost-effective, transparent and regulated. The exchange’s technology architecture supports multiple secured mode of connectivity such as MPLS leased line, point to point leased line, VSATs and internet and has handled up to 102.71 million transactions on a single day. The state-ofthe- art data centre of MCX is supported by best-of breed network and security infrastructure with high availability at all levels.
A favourable policy and regulatory environment, mainly through the permissibility of new products as well as participant categories offer a number of growth opportunities to MCX. Going forward with the process of bringing in measures towards market expansion, the company has taken a number of steps that will provide potential opportunities for MCX to bring in more liquidity and depth into the existing as well as new derivative products offered on the exchange. Hence, recommend a BUY.