Stalwart Advisors

Early in MCX but HOLD

We added MCX to our portfolio at Rs 945 during Dec 2017.

There is a strong thesis as to why we like it –

  1. new products (like options),
  2. new distribution channel (through broking subsidiaries of banks) and
  3. new customers (institutions like AIFs, mutual funds) would all expand the commodities market in a big way.

There was also a major concern around universal exchanges which though in the long run would have sorted out given winner-takes-all nature of industry, but surely a dampener in the short term.

Unfortunately, the latter got announced immediately after we bought hurting the sentiment. The on-going correction has only added fuel to fire.
Overall, the stock is down 23% since we added, what should we do now?

  1. If you already have it, just HOLD it.
  2. If you don’t have it or had under-allocated initially vis-à-vis suggested allocation of 5%, you should buy/add it.

Here are some triggers which we expect:

  1. Commodities Rally (near term)
    • Globally equities have started correcting and going by history Gold being safe haven should do well in this sell-off. Further inflation is making a come-back after long, which should again be supportive. As gold value goes up, MCX’s commission on each trade will go up as it is calculated on contract value (& not volume).
    • Similarly, Crude is doing well (Crude + Precious Metals contribute 59% to MCX’s volumes)
  2. New Strategic Buyer
    • Kotak’s 15% stake in MCX is reportedly on the block at an asking price of Rs 1400 a share. Blue Sky Scenario: We believe BSE could be an obvious contender given the synergies- it can lead to massive cost savings in MCX in key cost items of technology as well as human resource.
    • BSE has cash of ~ Rs 2,700 Cr on books and by investing about Rs 1,000 Cr. in MCX it makes a lot of sense to get 90% of Indian Commodity Market. MCX too has about Rs 1,100 Cr. in cash, so the cash pool of combined entity would stay same offering strength to compete with NSE. This could be BSE’s last chance to secure a meaningful position in exchange business.
    • Regulations may not allow NSE to bid as it already has stake in NCDEX.
    • All this will imply one less competitor in the exchange market with just NSE+NCDEX and BSE+MCX remaining as two dominant players.
  3. CTT Removal (medium term)
    • Tax on LTCG in equity markets has been brought back albeit at 10% (without indexation). Minister has been quoted saying STT isn’t removed and indexation benefit hasn’t been provided, as the rate of taxation for now is lower at 10% as against 20%. If tax on LTCG next year were to be increased to 20% (with indexation) along with abolishment of STT, CTT too might get abolished. The biggest jolt in MCX’s history has been levy of CTT as it killed the arbitrage and speculation potential, abolishment of which will be biggest trigger for volume growth.
  4. Market Expansion (long term)
    • With new products (options), new distributors (banks) and new players (institutions), the markets can only expand; daily average traded volume of ~Rs 23,000 Cr. in commodity market is only a fraction of Rs 7,00,000 Cr. of equity markets.
    • While we believe in the long-term market share has to remain with dominant player (winner-takes-all), in the interim competitive intensity will go up. However even during this period, if the industry size itself increases multi-fold MCX’s absolute volumes can still be higher than it is currently, despite temporarily losing market share.

In hindsight we were early here. But that’s how value investing is- sometimes one could be early and waiting could be longer, we are hopeful the thesis is intact and looks equally promising as it looked when we entered. Market cap at Rs 3,700 Cr. (EV at Rs 2,600 Cr.) has only turned more attractive.

We allocated 5% of portfolio to this position and currently staring at a 1.15% mark-to-market drawdown at the portfolio level. We don’t want to rush to increase allocation (avg. down) as yet, however, if price was to go down further, we may consider that.

For now, lets just hold on to what we have and add if we under-allocated initially vis-à-vis suggested allocation.


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Exact weightage will depend on each subscriber’s risk appetite & comfort. However, as a thumb rule, any position size under 3% is little insignificant to move returns at portfolio level whereas beyond 10% it gets riskier from a concentration standpoint. Accordingly, low could indicate 3-4% weightage, medium 5-7% and high 8-10%.
Structural are those portfolio businesses where earnings are relatively stable (less volatility) and further are expected to rise in a steady fashion. Cyclicals are businesses which experience periods of upcycle followed by downcycle and have large variation in their reported earnings based on industry demand and supply. The mix between the two depends on available opportunities and respective valuation of the two pockets.