Multi Commodity Exchange (MCX), in a filing on June 29, has said that they are extending the services of the existing software vendor 63 Moons Technologies, for six more months, the minimum extension period offered. Thus, the company has once again delayed the migration to the new Commodity Derivatives Platform (CDP), developed by Tata Consultancy Services (TCS).

The stock of MCX has opened 10 per cent lower on June 30 at ₹1,477.70, hitting the lower circuit.

The extension cost has become dearer as the existing vendor has charged ₹125 crore per quarter, a 54 per cent increase versus that charged for January-June extension. Thus, the company should pay ₹250 crore for six months beginning July 1. Comparatively, MCX paid ₹81 crore per quarter i.e., ₹162 crore for the six months commencing January 1. The company used to pay ₹15 crore per quarter prior to these extensions. The new CDP was originally scheduled to have been implemented by December 2022, and delays have been impacting MCX’s profitability.

What should investors do?

The profitability of the current fiscal will be impacted due to this extension. Bloomberg Consensus had estimated the FY24 net income at nearly ₹220 crore, which will now get revised downwards because of the additional platform expenses. However, this is a temporary overhang, and the company will eventually shift to the new CDP, which is a positive from a long-term perspective.

Following the announcement of the extension last time – December 30, MCX’s share price lost a little over 6 per cent in the following session. However, subsequently, the shares saw a recovery. Similarly, there are reasons to believe that the negative impact on shares due to the current extension is unlikely to be long-lasting. Since these are one-time and not recurring costs, markets tend to look past it post the initial knee jerk reactions.

In our bl.portfolio edition dated June 25, we had recommended an accumulate on dips rating on MCX. On the back of the probability of delay in implementation of new CDP and the extension of services with the current provider, we had anticipated potential for some drop in share price. Valuation being a little on the higher side was also a factor to recommend a accumulate on dips. Decline in share price due to the news of delay in the implementation of new CDP could be an opportunity to accumulate the shares. While FY24 earnings will be impacted due to the higher cost incurred, this will not impact long term earnings and profitability of the company.

The long-term fundamentals of the company remain intact. MCX’s market share in commodities derivatives trading is over 98 per cent. Its dominant position in this space remains well entrenched and thus it is likely to remain the leader in the space for the foreseeable future. In a growing economy, the runway of growth in commodities derivatives trading appears good and MCX will remain a key beneficiary of this trend.

We reiterate our accumulate on dips rating on MCX post Thursday’s news.