{"id":1131,"date":"2019-10-15T20:48:00","date_gmt":"2019-10-15T20:48:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1131"},"modified":"2019-10-15T20:48:00","modified_gmt":"2019-10-15T20:48:00","slug":"mcx-ltd-best-option-for-the-future","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1131","title":{"rendered":"MCX Ltd: Best OPTION for the FUTURE"},"content":{"rendered":"
\n<\/p>\n
\nMCX has given great set of numbers
\nfor Sep-19 quarter results. Turnover 100 cr vs 71 cr last year (excluding other
\nincome), PBT excluding other income is 43 cr vs 19 cr and NP at 72 cr vs 36 cr.
\nQOQ turnover is at 100 cr vs 79 cr and PBT excluding other income is at 43 cr
\nvs 23 cr. There is big jump in daily average volumes traded at 34500 cr vs
\n25648 cr last year vs 27473 cr in June-19 quarter. The average daily volumes crossed
\n30000 cr first time since the imposition of CTT in 2013. So this is indeed are
\nan awesome set of numbers and a strong catalyst for huge re-rating of the
\nstock.<\/span><\/div>\n
\nMCX has gone through some tough times
\nas far as stock price is concerned (although its business was always doing fine
\nin this period). <\/span><\/div>\n
\n
<\/span><\/div>\n
\nWe made first entry around 1000 in Sep-2016 (click here<\/a> and here<\/a> for earlier blog posts on MCX) and it touched
\n1700 shortly after that but then it was on a downward spiral after that and
\nthis year I have done some heavy buying at 700 levels to brought down my average
\nto some 850. But I never had the doubts on its great future growth prospectus
\nand have been continuously advising to buy more of this one at every fall to
\nthe email group of this blog.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nActually market got fearful after
\nSEBI allowed universal stock exchanges in India paving the way for the likes of
\nBSE\/NSE to enter commodity trading and market feared that the likes of BSE\/NSE
\nwould take the game from MCX by offering predatory pricing initially. So MCX
\nwas falling for quite a time.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut I always believed that predatory
\npricing is not the best strategy and history has proved this time and again.
\nBSE tried hard to get the volume for derivative business from NSE by offering
\nnil charges still it failed. When MCX was facing tough time due to NSEL scam in
\n2013, NCDEX (NSE Promoted) tried hard to fetch the volume by low charges but it
\nfailed miserably!! <\/span><\/div>\n
\n
<\/span><\/div>\n
\nWhy this happened and why MCX will
\nsee strong growth in business:<\/span><\/div>\n
\n
<\/span><\/div>\n
\n1) This
\nis due to \u201cImpact cost\u201d<\/span><\/u><\/b> which is the cost buyers have to bear
\ndue to lack of liquidity in the market and this cost is way higher than the
\ntrading charges charged or foregone by the new exchanges. Like if you want to
\nbuy 1000 nos. of stock A at 100 but at this price only 500 shares are available.
\nNext sell is at 102 so you have paid 1000 more for balance 500 shares. So
\ntaking the ideal price as the base, Impact cost here is 2% which is way higher
\nthan the normal trading charges. This is the main reason traders do not leave
\nestablished exchanges with strong liquidity. This is the experience across the
\nglobe and MCX has more than 90% share in all major commodities. That\u2019s why even
\nafter the start of commodity trading by BSE\/NSE in later stages of 2018 still
\ntheir impact on the business of MCX is just minimal. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut Impact cost is different from the
\nimpact of other factors like some news, any other fundamental factor effecting
\nthe business and its future. Here, the impact cost means the impact of low
\ntrading volume. Ideally at any given price and time, almost infinite trading
\nvolumes should be available for buying at any given price. Like one can buy
\nhuge quantity of ITC at NSE at any given price and in fact the constituents of
\nBSE\/NSE indexes are chosen based in the impact costs and the same should be
\nalmost nil.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo as we can see this \u201cimpact cost\u201d
\nis the another version of networking effects and this is one of the strongest
\nentry barriers in nay business as we can see the same happening for long time
\nin Naukri.com which is the undisputed leader in the segment for almost 2
\ndecades and nobody has hit Naukri even after trying hard.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n2) Also, if NSE\/BSE can attack
\ncommodity trading then MCX can attack currency trading. Currency trading is a
\nnatural extension of commodity trading. Like, if I am hedging my import of Oil
\nat MCX then I also need to hedge my currency exposure which at present I am
\ndoing at two exchanges. So MCX can target this area and chances of win are
\nquite high. <\/span><\/div>\n
\n
<\/span><\/div>\n
\n3) Entry
\nof Institutional players:<\/span><\/u><\/b> <\/span>One
\nof the major growth catalysts is and will be the entry of Mutual funds and PMS
\n(portfolio managers) as recently SEBI has allowed the participation of
\ninstitutional investors such as Mutual Funds and PMS in commodity trading. This
\nis the long awaited reform for Indian commodity market as institutional players
\ncan provide the much needed liquidity, research and price discovery to the Indian
\ncommodity market which is needed in order to attract the corporate houses (who
\nneed commodities for their businesses) to trade or hedge the commodities at Indian
\ncommodity exchanges.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBefore the entry of these
\ninstitutional players, the only players in Indian commodity trading was retail investors,
\nsmall commodity traders (as large corporates trades abroad due to very high
\nimpact costs), small numbers of corporate clients and some other small speculators.
\nSo as we can see these third world traders can\u2019t do any good for the commodity
\ntrading on their own, they need the support of much bigger and able players in
\nthe form of MF etc. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nInvestments into commodity markets will
\nhelp MF to diversify their assets and risks as when equity markets are down
\nthey can invest more in commodities where the prices are more fundamentally
\nderived because of the presence of ultimate users of the commodity in the
\ntrading channel which is not the case of stock market and this makes the stock
\nmarket very volatile. But I think MF\u2019s will first understand the commodity trading
\nand volumes will build slowly over time. I think there must have been some material
\nimpact of the participation by the MF\u2019s in the sep-19 results of MCX but the
\nsame will be much stronger in the times to come.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nActually the major function of a
\ncommodity market is the discovery of fair price; price is best discovered when
\nthere is sufficient volume and liquidity and there are INFORMED players in the
\nmarket not mere speculators. The role of a powerful and able regulator is
\nequally important as it is their responsibility to keep a watch and take
\nnecessary steps for the growth of the market.<\/span><\/div>\n
\n<\/div>\n
\nAt present banks are not allowed to
\ntrade in commodity exchanges but if allowed then Banks are going to be a major
\nplayer in both agri and non-agri commodities as banks have huge exposure to
\ncommodities as they lend to commodity players like farmers\/producers. Here, SEBI
\nis in favour of the same but RBI is not but if allowed then the same is
\ndefinitely be a great step for Indian commodity trading.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nI am yet to analyse the data for Indian
\ncorporates doing their trading and hedging in Indian exchanges but I think this
\nwill also grow in the future. I\u2019ll check the same and will post the analysis in
\nanother post.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n4) Then
\nthe impact of Option trading.<\/span><\/u><\/b> <\/span>Option
\ntrading has been allowed by SEBI and options are cheaper than futures due to
\nlower charges and low impact of taxes like CTT as compared to Futures as
\ntransaction value in case of options is very low at just premium paid (Not the
\nstrike price like in case of Futures). Also, downside is limited in options to option
\npremium paid while the same is unlimited in Futures. So options are the real
\nhedge products just like term insurance.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nAlso, hedging by Futures is very
\ncostly due to requirements of MTM and margin money which impact cash flow and
\nworking capital. So big corporates with tight working capital arrangements find
\nhedging through Futures very costly and capital intensive. So Options are the
\nanswer for their needs. <\/span><\/div>\n
\nBut as options are cheap so in short
\nterm it hit the profits of MCX last year but volume growth was always the main
\ncatalyst and this is going to happen soon. Right now, i do not think that options volumes are that high and there may be issues related to pricing of options (more on this in the next post).<\/span><\/div>\n
\n
<\/span><\/div>\n
\nMCX is mainly focusing on developing
\noptions business and launching index options which are major volume growth drivers.
\nAlso option business is difficult for new players like NSE\/BSE because SEBI has
\nplaced daily volume restrictions for exchanges to launch options like for Agri
\ncommodities the average daily turnover should be at least Rs 200 cr, for
\nnon-agri commodities, it is at Rs 1,000 cr. Building of this much of daily
\nturnover won\u2019t be easy for new players and MCX can build strong position in
\noptions by then.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n5) Rationalization of Commodity transaction tax (CTT): <\/span><\/b><\/u>This is another step which i am expecting from our government sooner or later and the same will happen when the entry of institutional players will have provided the much needed depth to the Indian commodity trading and the role of speculators\/cartel will be minimal. Any such rationlization of CTT will be a big booster for the growth of commodity trading in india.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nI have more to update on the various
\nfactors affecting the business of MCX but I\u2019ll do the same in another post on
\nthis shortly with more detailed analysis because I think this is one story
\nwhich is going to become very big in the near future and MCX can be the stock
\nfor next 5 years. NSE is scouting for acquiring a stake in MCX and I think
\nKotak was also looking to exit and as now it is back to strong growth so Kotak
\ncan now demand premium valuations from NSE and the deal may happen at much
\nhigher prices (may be at 2000). <\/span><\/div>\n
\n
<\/span><\/div>\n
\n
\nAt current market price of Rs. 1000
\nit is trading at PE ratio of just 20 (TTM) and forward PE ratio is just
\nsomewhere around 15 when it should command at least 40 keeping in view the fact
\nthat it commands more than 90% share of Indian commodity trading market. Its
\nmarket capitalization is Rs. 5000 cr when NSE (Biggest stock exchange) is going
\nto have a market capitalization of more than Rs. 50000 cr in upcoming IPO. For
\na perspective, commodity markets are way bigger than equity across the globe
\nlike in USA, commodity turnover is about 6 times the equity turnover, in china
\nthe figure is 2 times but in India commodity turnover is just 1\/10th of the
\nequity market. This points toward the
\nunexplored scope for high future growth for commodity trading and MCX in India.
\nSo I have no doubt that it is a very strong re-rating candidate and a must buy
\nat any price around 1100-1200.<\/span><\/div>\n
\n
<\/span><\/div>\n<\/div>\n
\n(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. <\/span><\/span>Reach me at oscillationss@yahoo.in<\/span>).<\/span><\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

MCX has given great set of numbers for Sep-19 quarter results. Turnover 100 cr vs 71 cr last year (excluding other income), PBT excluding other income is 43 cr vs 19 cr and NP at 72 cr vs 36 cr. QOQ turnover is at 100 cr vs 79 cr and PBT excluding other income is at 43 cr vs 23 cr. There is big jump in daily average volumes traded at 34500 cr vs 25648 cr last year vs 27473 cr in June-19 quarter. The average daily volumes crossed 30000 cr first time since the imposition of CTT in 2013.…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1131","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1131","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1131"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1131\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1131"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1131"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1131"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}