MCX: A perfect storm

30 Jun 2023 , 11:04 AM

Recommendation: Buy

Target Price: Rs. 1,550

This would write-off its FY24 earnings and result in 7% cut in FY25 estimated EPS (lower treasury income). Given constant slippages and associated earnings impact, analysts at IIFL Capital Services believe, the stock would de-rate and languish for the next 3-4 months, until there is clarity on transition. Consequently, they value MCX at 27x 2YF EPS (June 2025), at ~20% discount to its long-term average, and cut Target Price to Rs. 1,550 from Rs. 1,800. Analysts at IIFL Capital Services expect the stock to bottom out after initial reaction.

MCX extends contract again with 63 Moons

For the third time, MCX has extended its software agreement with 63 Moons. Last extension was ending on 30^th June and the Exchange was hopeful to migrate to the TCS platform on 3^rd July. However, given certain pending issues, it had to extend the contract again. The contract has been extended for 2 quarters (valid until 31^st December 2023) at a cost of Rs. 1.25 billion per quarter (versus cost of Rs. 150 million/quarter as per original agreement – so 8x cost. Cost of extension has been rising each time – the first extension was done at Rs. 600 million/quarter, while the second was at Rs. 810 million/quarter — now it is Rs. 1.25 billion/quarter. In all, MCX would pay Rs. 4.72 billion to 63 Moons for 5 quarters over October 2022 to December 2023.

FY24 is a write-off; FY25 estimated EPS cut by 7%

Analysts at IIFL Capital Services have cut their FY24 EPS estimates by 98% to account for additional payments of Rs. 2.5 billion to 63 Moons. Although there is no cost impact in FY25, lower treasury income is leading to 7% cut in FY25 estimated EPS due to decline in cash balance. At the end of FY23, cash balance stood around Rs. 9 billion, which is likely to decrease to Rs. 7.5-8 billion by FY24 end. On revised estimates, reported earnings are likely to grow by 30% p.a., over FY23-26; while the adjusted earnings would grow at 8-10% p.a.

Stock would de-rate; clarity on migration must for re-rating

Given constant delays in transitioning to the new technology platform, Street would be disappointed. Also, additional payments to 63 Moons have offset the cost advantage expected from the transition (treasury income hit of Rs. 300-350 million/year). Resultantly, analysts at IIFL Capital Services believe the stock would de-rate and languish for 3-4 months unless there is clarity on transition. Underlying business performance remains robust; however, this would have little impact on earnings and stock performance over the next 2-3 quarters.