Mumbai: Volatility in an asset class unnerves investors but boosts the fortune of exchanges that offer such products for trade. And that is the reason why MCX Ltd has seen its profitability improve several notches in the second quarter of FY20.

MCX’s revenue surged to about 100 crore in Q2 FY20 due to a rise in trading volumes. Operating revenues soared 41% year-on-year in the reporting quarter. Further, its lower fixed costs and a significant rise in other income saw net profit more than double year-on-year. This is more than the 70 crore on average MCX has seen in the preceding quarters.

This is because trading volumes on the exchange had shot up in the last quarter. In fact, MCX has seen an increase of about 40% in Q2 FY20 in average daily volumes, thanks to speculation and higher trading activity in key commodities such as gold and crude oil. Average volumes have also been about 26% higher sequentially over Q1 FY20.

The attack on Aramco’s oil facilities in Saudi Arabia meant that companies increasingly began hedging their exposure in the domestic market. It contributed significantly to the rise in trading volumes of crude oil futures. In fact, after the 14 September attacks, oil futures contracts saw a lifetime high trading of 26,622 crore on 17 September.

Besides, rising volatility in gold had an impact on futures trading of the precious metal. MCX saw a record 5.2 million tonnes delivered in August 2019, surpassing its October 2009 high of 5.05 million tonnes. Both gold and crude oil combined constituted about 60% of trading volumes on the MCX.

This was followed by metals (zinc, aluminium, nickel, silver, lead) and natural gas which comprised the rest. Trading volumes in base metals have shrunk, though. “Gold and crude volumes increased steeply by 133% and 88% YoY, respectively. However, base metal volumes declined sharply due to (1) the SEBI's directive to allow trading of only one contract per commodity and (2) the switch from cash settlement to delivery based settlement," said Motilal Oswal Financial Services in a note to clients.

As a result, MCX’s Ebitda margin expanded aided by lower fixed costs and the benefits of operating leverage. Ebitda stood at about 47.2% in Q2 FY20, compared with the 32.2% seen in Q2FY19. Ebitda is earnings before interest, tax, depreciation and amortisation.

Nevertheless, one has to watch whether such trading volumes are likely to sustain. With the US-China trade war likely to ease, volatility in commodity prices is expected to reduce, which means trading volumes on the MCX could fall. Hence, its revenues could tend to fluctuate depending on commodity-market movement.

A positive is that MCX has maintained its market share in the commodity segment despite increasing competition from other exchanges. Hence, for now, a price cut in trading on commodities has been ruled out. Though, with new commodity-based indices in the offing, competition is turning keener.

The MCX stock trades at a price-earnings multiple of 23 times its trailing 12-month earnings, which, given the fluctuating trading volumes, needs to be watched.

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