Financial Technologies: Don't bottom fish

It is not out of the woods, given the risk of absorbing NSEL's liabilities, legal issues, pressure on selling stakes and ramping up its tech-related business

Financial Technologies (FTIL) net profit growing more than 12-fold in the September quarter has had no bearing on the stock price with the stock trending lower over the past week. While concerns on the corporate affairs ministry draft order for merger of FTIL and National Spot Exchange (NSEL) continue, a closer look at the results indicate no improvement at the operating level.

The company’s revenues continue to decline due to reduction or selling stakes in its subsidiaries and more competition for the technology business. Revenues at Rs 38 crore have declined 58 per cent year-on-year and 12 per cent sequentially. Losses at the operating level increased due to higher legal and professional charges, which jumped more than two-fold, as well as higher other expenses. Losses in the September quarter have been Rs 29.4 crore and Rs 22.7 crore in the June quarter, as compared to Rs 40.3 crore profit in the year-ago quarter.

The higher reported profit in the quarter has come from other income boosted by dividend income (Rs 158 crore) while proceeds of stake sale in Multi Commodity Exchange (MCX) fetched Rs 843 crore.

Nevertheless, moving forward with the stakes sold in MCX and other subsidiaries, the benefits are one-off with no recurring income, as well as lower dividend income. A few days back the company announced that it will fully exit Indian Energy Exchange too. This will fetch it another Rs 576.84 crore.

Thus, with the company under pressure to sell its stakes in various exchanges, it is losing business opportunities, though sale proceeds will help strengthen its balance sheet. The risk of FTIL being forced to take on the liabilities of NSEL if merged is the biggest hangover on the stock. The NSEL liabilities stand at more than Rs 5,200 crore, which the government has asked FTIL to absorb.

What’s more while the company plans to focus back on its technology-related businesses for financial markets and scale it up further, the going is unlikely to be easy. The company’s products such as the flagship, multi-exchange ODIN platform are facing stiff competition. Analysts feel that given uncertainties, getting new orders in itself poses challenges. In this backdrop, investors are advised to stay away from the stock.