MCX Multi Commodity Exchange of India : Transcript of the conference call with investor/analysts on Q3 FY2019 results

"Multi Commodity Exchange of India Limited

Q3 FY'19 Earnings Conference Call"

January 15, 2019

MANAGEMENT:

MR. MRUGANK PARANJAPE - MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, MULTI COMMODITY EXCHANGE OF INDIA LIMITED

MR. SANJAY WADHWA - CHIEF FINANCIAL OFFICER, MULTI COMMODITY EXCHANGE OF INDIA LIMITED

Moderator:Mrugank Paranjape:

Ladies and gentlemen, good day and welcome to the Multi Commodity Exchange of India Q3 FY'19 Earnings Conference Call. This conference call

may contain forward-looking statements about the company which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guaranties of the future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing '*' then '0' on your touchtone phone,

Please note that this conference is being recorded. I now hand the conference over to Mr. Mrugank Paranjape -- Managing Director and CEO.

Thank you and over to you sir.

Thank you every body for joining us on the call today. Wish you all a very-very happy new year and greetings of the 2019 from our perspective come with what we believe was the best way to conclude the quarter that ended in terms of the turnover. So while we have mentioned this before, we at the exchange are extremely happy and excited by the fact that ADT for the quarter ending December was at 26,614 crores which represents the highest ever turnover in a quarterly basis after the imposition of CTT and as those of you who recollect the imposition of CTT was probably the biggest downside impact in terms of the business that we have seen over the last five, ten years. So really very happy with the way business has shaped up over the last quarter.

I will just run through some of the things that we have noticed some highlights that we have seen, thereafter we will turn it over to questions: First and foremost, within this increase in the sort of turnover that we saw the growth over the previous quarters in terms of number of contracts was driven by bullion and energy and in terms of turnover it was again driven mainly by energy, but we did see a good impact in terms of gold again inching forward. So I think from our perspective, gold moving up by more than 10% over the last quarter was really big positive. In addition to that the open interest in our gold contract really continues in a very big way. So on the 1 Kg contract, we crossed 18 MT, as of 9th we were even ahead of 19.5 and as we speak today I think we have crossed 20 MT. If you see overthe last two quarters we have gone from just below 8 to now over 20 MT.

That is a huge increase in terms of the open interest that we see. I singled out bullion because it is probably the best example but I think even in terms of our options contract which are still in terms of volume slightly a fledging contract, we do not report that number also in our turnover yet, but we have seen the highest open interest both in silver and in crude in terms of the options contracts as well. So, that is a very positive development for us because the higher the open interest, it just tells you the more depth that is there in the contract and the market.

The second thing which we noted and that is something we were looking at the reason why turnover continues to show the positives that we have seen in this year over the last three quarters was that it is not just volatility which adds to the turnover but the fact that volatility is coupled with increasing participation. When I say that I know in terms of the unique client codes that are registered with the exchange, there is a minor dip, but that dip is more because as we have seen lot of our members are combining their equity and commodity memberships and there are other consolidations happening. And during this process, there is a lot of weeding out of absolutely inactive and this is what has led to probably a small dip.

But what we have noticed is that the actual traded clients in the exchange has significantly gone up in the last quarter as well. An indication of that is in the financial year '17-18, we had about 271,000 unique clients were traded on the exchange. As we speak in 9.5-months, we have almost touched that number already. So that is a phenomenal increase of more than 20% in terms of the number of clients who are trading on the exchange. And that widespread participation we believe is a direct result of the one pillar which we have been about speaking about on all our previous calls which is in our opinion now kicking in, in terms of the impact to the ADT. And that is the distribution angle. So, as members are combining their equity and commodity arms, we are seeing those members really have a bigger uptick in their volumes and that is something which was probably expected but also little surprise, because the expectation was that members would save cost base and therefore become more efficient, but what we are also seeing is that by share combination of the sales force, members are now reaching out to a wider audience. And that is really increasing the participation in the commodity space.

Secondly, while there has been slight delay in the onboarding of the bank subsidiaries in terms of going live, we do have two bank subsidiaries who are now live on the exchange and we are very-very certain that two more will go live within this month bringing that number to four. But for the subsidiaries which have been live, their volumes are already showing pretty good number and that is another reason why we think that the overall participation is going up and that is a positive as well.

I will just spend a few minutes on some of the financial numbers because I think they are important in terms of what we have been speaking throughout this year and in terms of your understanding of our numbers going forward. So while revenue is pretty straight forward in our case to understand because it is a direct correlation to the turnover, I think something which we had mentioned before is on the treasury portfolio. As we speak expect for some portion of the tax-free bonds which we still hold, we now have absolutely no exposure to long-dated or long tenor debt in our mutual fund portfolio and that is helping us pretty well in terms of the returns that you are seeing on our treasury portfolio. Combined with good turnover and steady treasury portfolio, I think the other thing which we wanted to reemphasize was that while there may be a minor increase in the cost for this quarter, there is about 4.5 crores of one-off cost which are very-very specific which we had to take this quarter and we are very confident therefore that in terms of the cost base we will absolutely be within those numbers that we have been talking on all our calls till now which is that on an annual basis while the variable cost will remain in line with the revenues, the fixed cost will not go up by more than 2-3% on per annum basis and that is the number which we are absolutely confident of delivering even for this year in spite of the one-off. The one-off that we had this quarter was about 4.5 crores, roughly 2 crores legal expenses for certain specific things where we had either some old cases which we were closing out or certain matters which came up during this quarter but these are very certainly one-off cases and we will not have these expenses going forward. There is Rs.2 crores of regulatory expenses which are one-off.

These are because there has been an ongoing discussion on some of the expenses that we book towards the IPF and ISF which SEBI has opined that could not be booked to those funds. So while on an ongoing basis there is going to be no impact, we had to take some reversals to the previous two years as well and that is the Rs.2 crores of one-off expense that we aretalking about. In addition to that, we have a commitment to meet our goals under the CSR guideline. In that our expenditure has been slightly lower than what is required as per the guidelines under the Companies Act. So there was about Rs.50 lakhs of increase which was more of increase from CSR perspective. That is probably something which will not be there in the next quarter as well. So, 4, 4.5 crores is one-off expense which would explain why in the expense line you would see under the other expenses the cost line has gone up. But with this and with the way we have been efficiently managing on the tax, again because we have been making movements in our overall treasury portfolio, we are very happy that this quarter's PAT is a healthy Rs.41.99 crores to be precise and that also is the highest PAT on a quarterly basis in the last four financial years. So I think those are some the highlights in terms of the numbers.

I think in terms of key expectation that we have over the three to six months in terms of regulatory and other developments, first, we are now increasingly, I think, in a position to say that we feel confident that institutional investors will be allowed in this market during this quarter.

Our confidence from the fact that this regulatory impediment from a custodian services basis which was coming earlier has been removed by SEBI in the last quarter in their board meet and that paves the path for institutional investors to really come into this market. So we remain absolutely confident that that will happen this quarter.

The other development which we expect in terms of expanding our product portfolio is that we believe that SEBI will allow index-based products to be traded on the exchanges. That is a very important development because index-based products as you would be aware if you look at the turnover in the equity markets, probably are the biggest portion of the entire turnover of the equities markets in the derivative space and therefore it is a product where we believe there is good potential in India and also the fact that they are cash settle products will probably appeal more to people who are trading in commodities.

Having said that, I think there is one change which we are undertaking currently on our product mix which is to convert our metal contracts from cash settle contracts, deliverable contracts, this will start in the month of March and continue over a period of four to five months. Again, this is something which has been asked to us. We believe that there is no reason