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  • Jul 21, 2023 - Can This Little-Known Small Cap Company be an 'All Or Nothing Stock'?

Can This Little-Known Small Cap Company be an 'All Or Nothing Stock'? podcast

Jul 21, 2023

Find out what's in store for this company available at distressed valuations.

Is it worth the gamble or a dud in the making?

Hi Guys, this is Aditya Vora,

Hope all of you are in good spirits seeing the markets at an all time high.

So , Last week while I was browsing the BSE website to check on some updates regarding the companies I track, I came across a hilarious communication from a company not known to many.

Seldom do we come across such funny and sarcastic communication from managements.

I am sure, it can only happen in small and micro-cap companies which are unknown to the investing community.

Some of the extracts from the press release were...

  • 'We wish to inform that we have once again agreed to the eleventh-hour request by Multi Commodity Exchange of India Limited (MCX), which according to MCX is for the 'last time' for one more time'.

    Another one read as...

    'We sincerely wish that this 'last time' really happens someday, so that we deploy our excellent team of exchange technology engineering group in mega promising opportunity in new digital world'.

    'As the founders and well-wishers of MCX, we wish them good luck with these new experiments and hope that they will reach the right destination one day'.

Trust me , I have seen many press releases in my investing career but this one was a clear jibe at the management of MCX who sources the trading software from this company.

Well, the company in contention is 63 Moons Technologies Limited.

What if I tell you many of you have even worked on the products of this company. In fact, people who were active in the stock market 10-15 years ago might have been shareholders too.

63 Moons Technologies Limited is the erstwhile Financial Technologies.

It is the same company which provides the ODIN software for NSE brokers. In fact, the company has developed a range of financial market software that simplifies trading and settlement of commodities and currency.

On reading the press release and realising this was the erstwhile Financial Technologies, I did some basic calculation to understand the value of the company.

The results presented an all or nothing opportunity. In fact, it opened a pandoras box when it came to the 'Hero or Zero' type of stocks.

While most people in stock markets are programmed to invest their money in safe stocks or large cap index stocks, the risk-taking crowd ventures in to small and mid-cap stocks.

In my opinion, a portfolio should be constructed in a way where a sizeable portion of your money should be parked in safe stocks (may be 50%) while out of the remaining half, 45-47% should be in good quality mid and small cap stocks.

A fun fact which I am sure most of you will relate to is that how much ever we talk about safe stocks and being risk averse, there is some element of speculative urge in all of us.

That is where the 3%-5% allocation is.

These stocks are called 'Net Net' stocks or 'Hero or Zero Stocks'

These are undiscovered opportunities based on certain parameters which can give 4-5x returns when the market discovers the opportunity.

However, the downside too is sharp. You can lose all your money.

As a fundamental analyst we are always on the lookout for opportunities in stocks which are available at much lower valuations than their intrinsic value.

Apart from the conventional valuation metric like stocks trading below their book value, the measure which I have used to value 63 moons is a strong indicator of the starting point to find diamonds in the rubble.

This metric measures net cash available after reducing its debt and compares it to the market cap of the company.

In simple words, when the cash per share at the company's disposal is more than the market price per share, it indicates how lucrative the valuations are.

Basically, you are getting the company's business for free.

So, the question is ...

What happens when we buy shares of such companies? What are the returns for a basket of stocks?

I did some back testing, and the results were unbelievable.

This slide shows you the list of companies whose net cash is more than the market cap of the company.

The above data is from March 2020 when the markets hit a low.

So If you would have blindly invested Rs 10,000 in equal proportion in the above stocks in March 2020 by running the basic screener, the results as of 2023 were fascinating to say the least.

The return from the above portfolio from March 2020 to June 2023 was 6 times which is 500% gains over the past 3 years.

The back testing did work.

These stocks my friends are the all or nothing stocks.

Let us come back to the stock in contention... 63 Moons Technologies Limited.

This slide talks about the financials of 63 moons as of March 2023.

If you look at the numbers, the company has Rs 1400 crore of cash with it while the market cap of the company is some 1100 crores.

The stock is available at a discount of 20% to its cash value.

In short, with the cash which it has, the business is available for free. There is no value assigned to the business.

Also, from a fundamental perspective, the stock of 63 Moons Technologies Limited is available at 0.3 times its book value.

If you are getting a business for free, isnt it a no brainer to just buy the stock blindly?

Well, only if making money from the stock market was so easy.

The issue is with revenue visibility and how sustainable the cash position will be.

Let me explain.

63 Moons Technologies Limited has its service order for Rs 2.5 bn extended by 6 months from MCX.

While the next 6 months are guarded for the company in terms of revenue visibility, the problem is what happens post 6 months.

The company did a revenue of Rs 2.9 bn in FY23. A major part of that revenue was from MCX (80%).

In the event of MCX not renewing its contract when it expires in December 2023, 63 Moons Technologies will again plunge into losses.

There will be a cash burn and Rs 14.3 bn of cash on books will start to evaporate in the absence of sustainable revenues in the future.

On the flip side, if the management proactively can grow its revenues or can bring in some inorganic growth with the huge cash it has, the stock can be a game changer.

So here is the final Word...

If revenues are sustained and the company can grow, the stock is available at dirt cheap valuations however in case the company cannot grow its revenues organically/inorganically, it will be at the expense of cash burning.

Please do note, this is an all or nothing stock and the outcome is dependent on many variables. Investing in such stocks is fraught with risks.

While the back testing worked for stocks which had cash more than the market cap of the company, time shall tell whether 63 Moons Technologies can be rocket or a dud.

Aditya Vora

Aditya Vora (Research Analyst) Hidden Treasure has 7 years of experience in the markets as an equity research analyst. He is a Chartered Accountant by qualification and worked with some of the big names on Dalal Street like Motilal Oswal, CRISIL, and IDFC securities. He follows a rigorous process of financially screening stocks. At the same time, Aditya believes an investor's edge lies in capturing qualitative factors. His forte is bottom up stock picking. However, he is also a firm believer in the importance of market cycles. Especially identifying emerging themes at an early stage.

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