Q4FY23 Review: MCX: All Hands on Deck

23 May 2023 , 10:54 AM

MCX’s Q4FY23 and FY23 performance has been marred by exceptional payments of Rs810mn and Rs1.4bn respectively to 63 Moons. Over Q4 earnings call, management said that they are hopeful of completing the transition to the developed technology platform of TCS by June 2023. As the company requires 2-3 weeks to complete system audit, analysts of IIFL Capital Services believe timelines are tight; but management seems to be adamant to meet deadline. At 25x FY24 EPS, the stock offers favourable risk-reward; smooth and timely transition to the new platform would be a key re-rating event.

Payment to 63 Moons mars Q4 performance: 

As expected, MCX’s reported PAT was down 85% YoY and QoQ to Rs55mn given the exceptional payment of Rs810mn to 63 Moons for Technology. Operationally, revenues were up 26% YoY driven by 143% YoY in option premium turnover to Rs10bn ADTO. Sequential weakness (revenues down 7%) was due to 15% QoQ decline in futures volumes to Rs206bn ADTO and flat QoQ option premium volumes. We note that despite 18% QoQ increase in Notional Options volumes, premium turnover was flat as the premium ratio fell from 2.6% to 2.2% QoQ. Management shared that higher volumes in the near month contracts and/or out of the money contracts — led to this.

Hopeful of completing technology transition by Jun’23: 

After a 3- quarter delay, MCX management is hopeful of migrating to TCS’s developed technology platform by end of June 2023 (contract with 63 Moons ends on 30-Jun-23). Although the company has not shared any timelines. Based on multiple mocks and parallel runs, it expects transition to complete in time. Currently, 170-180 of the 350-400 active members have participated in mocks; more are likely to complete the testing near to transition date. Cyber audits have started, but complete audits would require 2-3 weeks; thus, MCX needs to be ready with the platform in next 2 weeks.

Smooth and timely transition a key re-rating event: 

Despite strong operational performance, MCX has underperformed market given slippages on technology execution. Additional payments to 63 Moons (Rs1.4bn in FY23) resulted in flat profits in FY23 vs 35% YoY revenue growth. Smooth and timely technology transition is a key trigger for the stock; at 25x 1YF PE, we see the risk-reward as favourable. Note that every quarter delay leads to ~25% cut in FY24 EPS (assuming Rs810mn/qtr payout).