I have similar kind of thought process for MCX and hence it forms around 20% of my portfolio bought at around 500. The way the recent few months have progressed, I am getting more confident that a strong long term anchor investor (Kotak, Tata Cap, CME etc.) will start managing this exchange eventually and Jignesh will have to give in. That’s positive for long term.
On thing that worries me a bit is the likelihood of Ranbaxy kind of events unfolding down the line. Some hidden inter-party transactions between FT and MCX, some contingent liabilities (not showing up in the current balance sheet), penalty associated with breaking the long term (I guess around 33 years) technology contract of FT with MCX etc. might come up in the future and may spoil the party.
Here are the probabilities that I have mentally come up with the likely scenarios that might unfold:
A strong and reputed anchor investor (with 24% stake) comes on board, no hidden surprises and slowly the operating business improves (volume increase, more participants, more revenue avenues open up etc) : 6****0%
A strong and reputed anchor investor (with 24% stake) comes on board, some hidden surprises crop up : **20% **(I wish this does not happen given MCX is regulated by FMC. But, NSEL was a day light robbery and anything can happen. Fingers crossed!)
Multiple parties buys FTs 24% stake and the exchange is run like a PSU : 10% (the latter looks less likely given the way NSE is managed and run today)
FT does not give in and the things get into legal tussle : **10% **(assigning it 10% owing to the political clout JS might have)
I feel with the above mental construct, I am taking chances were chances of winning are higher. Would love to her your thoughts?
There is lot of uncertainties around this and no matter how it plays out…it still remains a speculative bet. Insiders are selling…holding above 1% has come down from 47% to 33% approx.
The positive is there are big players involved like Reliance Capital, Kotak Mahindra Bank, BSE, Tata Capital, CME, Deutsche Boerse, DGCX, Warburg Pincus and Medist in bidding process to buy out 24% from promoters stack.
MCX stake sale: Reliance Capital wants FMC to intervene
Dear All,
Anyone knows what is happening on this counter? The price has moved from 1200’s to 700’s in a matter of few months. The market share seems to remain constant. While the threat of BSE entry is there, I assume it will be very difficult for BSE to dent MCX’s volumes. Further, there has been a continuous improvement in the the volumes since the last 3-4 quarters.
Any guesses as to what is going on. Dhwanil, any views?
Abhishek
I personally feel that there is nothing substantially negative happening in MCX to warrant the sharp correction. At the same time, we must view the correction in the context of following
Market has corrected significantly in last 2 months
on FY 16 normalized earning of 120-150 odd crores, company is trading at 25-30 times earnings even after correction.
FMC-SEBI merger has been consummated but the positive impact of same has yet to reflect in policy changes (Bank/FII participation, options in commodity etc)
Commodity prices have been very volatile and is on sharp downward trajectory. As you must be knowing, MCX charges transaction fee on value of the contract and not on volume. Thus, higher volumes traded on the exchanges are countered by lower price of the commodity and hence the value traded on the exchange has remained largely constant (not reflecting higher volumes)
Thus, I feel that the long term investment hypothesis remains valid. At the same time when and how some of the catalysts/tailwinds will play out is hard to predict. However, business remains strong as ever in my opinion. As I had said earlier, I am looking at MCX from a 10 year story perspective and my conviction levels has increased in it post FMC-SEBI merger.In my view, it is an event which will have far reaching positive impact for MCX in the long run. In fact, around 750-800 odd levels, it looks very interesting to further add up.
Excerpt from the Rakesh Jhunjhunwala Economic Times interview posted today -
ET
Now: An interesting stock you have is MCX. The reason why I want to revisit MCX is because a commodity exchange may not do well when there is a bear market in commodities. The numbers are also showing that volumes are coming down. Is that investment giving you second thoughts?
Rakesh Jhunjhunwala: No, I do not think. In India gold consumption is not going to go down and
it is a primary centre for gold and silver and also oil. Maybe volumes will come down a bit, but I do not see any replacement for it. If they are able to introduce options and futures, then I think they
will take the cake and have the highest volumes
Hi Dhwanil,
Good to know your views. Do you have any views as to how BSE entry into commodity segment will impact market share of MCX. The only thing that scares me is that this is a winner take all business. I have read that BSE platform is much faster than MCX platform. Do you think the faster platform speed can allow users (traders) to overcome the impact of higher impact cost due to lower volumes?
Abhishek.
Main reason for mcx under performance in recent times in my opinion is
(1) No promoters and it is currently managed by former govt bureaucrats who dont like to loose control and allow professional management like kotak etc to manage the affairs. They has tendencies to increase management salaries etc and no much concern for long term shareholders value creation.
(2) After FMC Sebi merger scenarios it may possible that NSE , BSE etc may start commodity trading similar to stock trading and available in all existing share trading platforms and separate commodity platform may not be a competitive advantage
(3) Recent Govt of India gold bond schemes offer a good alternatives to hedge gold and earn even small interest for many small jewelers and need for future trading in gold may be impacted. There is fear that in future these kind of more schemes may be launched which impact gold future trading needs.
Commodity super cycle is over and after the huge crash in almost all commodities ,consolidation phase with low volatility is quite likely ( as is observed in past commodity cycles ). As we know volumes have direct co relation with volatility and if volatility recedes after the crash , wont the prospects for MCX affect significantly?
In the latest interview , MCX MD pointed out a key risk -
Do you see competition going up in the commodity exchanges business as SEBI takes over and equity exchanges establish their commodity platforms?
We feel both the BSE and the NSE will debut with their commodity platforms and it is going to be a challenging task for existing commodity exchanges. Because of fungibility of margins, cost of transaction on commodities will be lower in these exchanges.
But, it will take time. SEBI may not give a green flag to security exchanges to launch commodity platforms or commodity exchanges to launch securities segment until the existing commodity exchanges and brokers fully understand new products, such as commodity options, and indices, and commodity exchanges are at par with securities exchanges. Capital markets are way ahead of commodity markets, they provide co-location facility to members, they have options trading on their platforms, but commodity brokers are not exposed to all these.
It is very difficult to see through the crystal ball and predict impact of new entrants like BSE & NSE on MCX’s market share. Though, my own investment thesis is based on the central premises
The current commodity trade on exchanges is set to grow exponentially due to introduction of options, new products and new participants. Thus, my hypothesis is that the pie will grow much bigger than what it is today (multi fold).
World over, it has been difficult to take away market share by new entrants from incumbents, especially in commodities where they enjoy monopoly. Thus, even if BSE/NSE enter the commodity exchange space, MCX may shade some market share, but is likely to remain leader in energy/metals/precious metals. (this has been proven in India. NCDEX has retained it’s market share in agri commodities inspite of MCX launching number of agri commodities contract and similarly MCX has not given away any market share in it’s forte to NCDEX inspite of NDEX launching contracts in gold/silver/energy)
On faster platform speed- I do hear that it at times is an attraction for speculator. However, I wonder if that is a preference of customers (traders), what will stop MCX from emulating/adopting the strategy and moving to a much faster platform? At the end of the day, there is nothing so proprietary about faster platforms and are but are supplied/built by third parties/providers.
Another perspective we should keep in mind: when SEBI will allow BSE/NSE to enter in commodity space, it will also allow commodity exchanges to enter equity/equity derivative space. It will be a two way street. Thus, the target market for MCX will also expand and it may too decide to enter in that space.
Well said Dhwanil, I guess there is nothing more than we can do than wait and watch. One thing is for certain - if in a year or 2 BSE is not able to make any major dent on volumes of MCX - it will definitely call for higher allocation toward the stock!
one more point i like to add to Dhwanil that it is not easy to get volumes right away because it is winner takes all kind of model , traders will trade where volumes are high and contracts are more liquid. e.g. BSE never recovered in F&O segment once NSE had some momentum(BSE tried market maker and small lot ).
disc: No holding. like business, but it is surely not win win so socialist in me gave pass.
I think margin fungibility in nse is a big thing which can reduce the cost of transaction for players already doing equity trading , so a party who is already trading in equity markets may prefer nse over mcx because of margin fungibility , as per various reports most of the traders in commodity market also trade in stocks so NSE can give a big fight to MCX !! . This view expressed by the MD himself in one of recent interviews.
Government in 2015 budget had announced waiver of tax on transaction in equity, commodity and currency in GIFT city …
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Transaction tax and stamp duty, along with other levies, form nearly 50% of statutory costs for equity and commodity market participants.
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Trading can also be done in gold, silver, crude and other base metals and currency segment.
Mcx has some 1000 odd crores of investment in mutual funds etc.and earn some 100-120 crores of annual income by way of interest and dividend from these investments. It has been reflected as other income of 30 odd crores per quarter.
@kanvgarg123 Mcx has some 1000 odd crores of investment in mutual funds etc.and earn some 100-120 crores of annual income by way of interest and dividend from these investments. It has been reflected as other income of 30 odd crores per quarter.
