Mphasis in March 2016 booked an extraordinary loss of 316.28 million rupees for changing their ATM model. This was for projected losses over 5 years. The ATM revenue line is about $10m US a quarter per the minutes of the analysts call in March. This loss would be after expected revenues.
Remember early on we had our friend from India saying Mphasis bid too high for ATM licences and they wouldn't make money. He was right and that is why TSI did not bid at the time of the banks awarding contracts.
Now here is the rub, I believe we are on a cost plus model with Mphasis over the 5 year contract period. This is why we can be reasonable certain of the 2017 EBITDA of $17-20m. Mphasis wears the loss of the bad bidding decision and has already accounted for the expected losses over the 5 years. Naturally the reporting on this has been sketchy and it is only my guess from what little is in the public domain. We get the benefit of a predictable revenue stream and access to a platform that will allow growth, through additional services, Pan-India spread and a great technology partner.
As I posted previously (even though my managerial finance studies have well faded), I took those figures and came close to the accounts valuation, using certain assumptions in the notes to TSN accounts and others and ceasing the majority of cash flows in five years.
Now Mphasis has stated they are not walking away from the ATM business. To understand this, I believe you need to look at their other products like Hypergraph and I think its Infograph. Essentially they are big data collection and analysis engines. They have also produced digi-ops we automates all these processes. What Mphasis needs is touch points (ATM's, POS, card transactions etc) to collect this data, run it through the systems and produce valuable data. Such data includes being able to check spending and saving habits to credit score people for credit score lending. Mphasis makes money from loan and mortgage BPO services per their accounts. Big data is very valuable as evidenced in a lot of IT deals.
By taking this charge, Mphasis was able to improve margin by .6 to .7 basis points going forward. This would help increase share price later, especially with their revenues approaching US$1billion.
Now I believe our cash flows will not end in 5 years at the end of this contract. If we do a great job, this and other work will come our way, plus the expertise and relationships developed will be hard to replace. However, a five year contract needs to be valued for that period only for accounting.
The SREI deal is also a cost plus per the announcement. Now SREI is a rural equipment finance lender. Now it would stand to reason they would want touch points to run big data on, to qualify the people they lend to amonog other aims they have in rural infrastructure (such as there e-commerce villages).
As I said a while back, this was looking more like an infrastructure play than one based on solely on transaction volumes (although there will be significant upside to this as well, as stated in the SREI announcement if volumes achieve over a certain level more income accrues to TSI) .
Time will tell.
Cheers
TSN Price at posting:
2.2¢ Sentiment: Hold Disclosure: Held
