Hi Amol, Sanjay’s calculation is based on this - 81Cr hit on P&L each quarter for Q4 and Q1 as they could not migrate to TCS platform and 63Moons the current vendor quoted that cost for maintaining the platform. And since MCX was trading at 5 times book value; hence 5*(81+81)=810Cr… However my doubt is why not multiply by PE which is 36!!, whatever extra they would be paying to 63 compared to what they had negotiated with TCS!
More importantly my concern with MCX is - whats the guarantee that this migration to TCS from the current vendor will not get pushed few more quarters… Its been going on since 2020! Not having access to source code is the biggest weakness in this platform business I feel… pls correct if wrong…
Value of any company is the present value of all future cash flows. P/B in my opinion is not the right way to value this company, especially since it pays out 60-70% of profits as dividends and has no reinvestment use for any profit it generates. Book value compounding will always be lower than the underlying performance of the business due to dividend payout. The hit to the future cash flows is to the order of 180 cr, assuming timely delivery of the new platform: about 2.5% of the then prevailing market cap. That is why I believe items of this nature which are temporary in nature have little bearing on the long term value of the company; however they dominate the narrative. 75-80% of the questions on the previous concall were about the software platform that has little to no bearing on the value of the company.
In the meanwhile, it was good to see Options Volumes rebound in February. Highest ADTV till date and highest volumes till date despite Feb having fewer trading days. As the company launches new contracts, and brings duration of the contracts down further to forthnightly and eventually weekly; there can be a huge jump in options volumes. Most of NSEs volumes come in options with weekly expiries.
They have 63 moons contract till June end only but they still have not communicated a date for transition. Mgmt seems to be fooling everyone by hiding the true facts. It could be either way but looks more like the transition has some glitches still to be ironed out, otherwise why won’t they communicate a date till the last week.
MCX seems to have scheduled one mock trading on the new TCS built platform last Sunday, since this seems to be important for the firm, they should inform the exchanges today for sure on the outcome!
The consecutive extension of 63 Moons Technologies contract and failure by the new service provider stick to the originally agreed milestones mandates an introspection of whether they have enough competency to build a complex trading platform.
Or this can be an issue of corporate governance. Like you delay it on purpose. I don’t think a platform implementation should take this much time. some friend of mine from it background says all you need to show is some bug or change somewhere to delay it which is irrelevant to trading.
In that context, IEX (Indian Energy Exchange) made the right move in 2017/18 to buy out trading software, source code and resources from 69 Moons (FTIL) for 130 Crs. approx while FTIL was marred with scandal/ forgery charges.
Its also considered that the tech stack that IEX has got from 69 Moons is much better as compared to competitors platform, and is one of the key edge.
Apparently, the CEO did indeed insist on extending the 63Moons contract for a year last september to be on the safe side. The board filled with public interest ex-bureaucrats overruled him.
Paying a fee of 250 crore (125 crore/quarter) while the revenue itself is only 149 crore is a mockery and poor management. The management and the board are answerable for their decision to go with a vendor like TCS who doesn’t have any past experience building trading platforms, for not exercising the option to buy the source code and IP rights (63 Moon is open for that as per the above article), and for failing to stick to the agreed milestones.
Interestingly, they were paying a meagre amount of Rs. 16 crore per quarter if it was a long term contract
Poor corporate governance practices, and something is really fishy.
I guess the sticking point was the nature of the contract. MCX wasn’t willing to share a cut of the revenue, & wanted a fixed price contract with the software vendor.
With the trading volumes going up because of options, I think what the management chose to do was the right thing. But they, along with TCS, failed miserably in the migration to the new platform.
This episode also raises doubts about the large IT service providers like TCS.
We have seen this with Infosys as well in the past, when they were unable to deliver bug free software to Income Tax department in spite of large team working on it.
This looks like a wake up call for the customers of IT service companies that, you should select the vendors based on proper check lists and evaluation and not just based on their size.
Disclosure: Ex-IT professional with investments in TCS and HCL Tech.
