MCX – The Monopolistic business
Multi Commodity Exchange of India (MCX) is the largest commodities exchange in the country, commanding a dominant market share of 90%. Globally, it is the sixth-largest exchange with a 5% market share. It facilitates online trading, clearing and settlement of commodity futures transactions in varied asset classes, including bullion, industrial metals and agriculture commodities; however, its current volumes are dominated by non-agri commodities with over 90% of traded volumes.
It has established an extensive network of over 700 SEBI-registered members and operates through over 590,000 trading terminals in more than 1,700 cities/towns. MCX is professionally managed, with no identifiable promoter and Kotak Mahindra Bank being the single largest shareholder with 15% holding.
Commodity futures are at a nascent stage in India, with significant under penetration. The exchange traded derivative volume size is of 4x the physical market vs. 35x-40x the global average. Growth potential in the economy like India’s remains huge over the next decade, which is expected to drive the demand for commodities. The increase in physical market volumes consequently increases the hedging requirements for industry players, influencing derivative trading volumes.
MCX is a world-class monopoly in India’s commodity futures market, with a dominant market share of nearly 90%. Company has high operating margins aided by its asset-light business model, with low capex requirement and a high fixed-cost base. Its robust technology infrastructure has the capacity to handle 6x-7x more transactions than the current levels, providing significant scope for operating leverage.
It has consistently invested in technology; the current infrastructure can handle 40m transactions/day, which is well above the current activity levels and is fungible to support options and index trading. This readiness offers MCX with scope to grow its business sustainably over the long period of time. It is also exploring related businesses such as data services and education.
MCX’s growth strategy focuses on offering innovative products and building a scalable technology platform. The exchange was the first to offer mini contracts to cater to the hedging requirements of small enterprises, start evening sessions to match the timings of international exchanges and develop composite commodity futures indices. MCX has entered into strategic tie-ups to expand its reach and product offering, and launch an international exchange at GIFTcity.
The merger of SEBI and FMC is expected to change industry dynamics by establishing better credibility and also paving way for the introduction of new products, including options, and opening of the market to institutional investors. In addition, an improving economic environment, increasing awareness about hedging and diversion of trades from unorganized markets are expected to open up huge opportunities.
MCX is expected to be one of the biggest beneficiary of fast growing financial industry in India. Company has consistently maintained its market leadership over the last few years. The recent hike in transaction charges (first time across slabs in 10 years) reflects its pricing power and will further boost earnings.
Its High dependence on few commodities; gold, silver, crude oil and copper which account for 85% of volumes, Imposition of CTT, loss of business to unorganized trading and weakness in global commodity prices are the risk factors for the business.