Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss:

• Persistent Systems (PSYS) continues acquisition journey
• US Fed hikes rates
• News around the world
• Trading & Investing Machine….new product in our arsenal
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 16,975.35 | +312.35 (+1.87%)
FII Net Bought: INR 311.99 crore

Sensex: 56,816.65 | +1,039.80 (+1.86%)
DII Net Bought: INR 772.55 crore

Company News

Persistent Systems (PSYS) continues the acquisition journey; what’s up and what do you need to know?

MediaAgility is a global cloud transformation services provider with deep expertise in building scalable, cloud-based solutions as Google Cloud Premier Partner. The company provides cloud-native application development and modernization, analytics and AI, cloud engineering, migrations, and managed services to ~35+ clients globally.

Deal Details

• PSYS has entered into an agreement to acquire a 100% stake in MediaAgility INC and its subsidiaries in Mexico, UK, Singapore and India, for a total purchase consideration of ~USD 72 Mn, payable in cash
• The company is expected to make an upfront payment of USD 53.2 Mn, maximum earn-outs of USD 17.7 Mn over the next two years, contingent upon achievement of certain performance thresholds, and a retention payment of USD 0.7 Mn to key employees of MediaAgility
• The transaction does not require any government or regulatory approvals and is expected to close within 6-8 weeks

Deal Rationale

• Through this acquisition, PSYS will enhance its partnership with Google, with the deal expected to be the foundation for a dedicated Google Business Unit, and offer verticalized solutions around the Google Cloud Ecosystem
• Likewise, the acquisition is expected to strengthen the talent base for PSYS, with 220+ Google Cloud certified architects and cloud engineers in the US, Mexico, UK and India expected to join the company

Financial Rationale & Impact

• PSYS expects a 0.4/0.5% impact on EBITM in FY23 due to employee retention payment and amortisation charges, with the likelihood of those being eventually absorbed by synergy benefits
• MediaAgility earns ~80% of revenues from long-term clients with >3 years of relationships; PSYS expects a high quantum of cross-selling / up-selling given the limited overlap in clients & capabilities
• Revenues for MediaAgility have grown in the recent past, up from USD 9.6 Mn in FY19 to USD 25.5 Mn for LTM Dec’21; PSYS expects to add ~3% to topline through this acquisition in FY23

Thoughts? Valuation considération, PSYS plans et al.

• Acquired at a ~2.8x EV / S on TTM Dec’21 Topline, the deal accelerates and deepens PSYS’s Google Cloud competencies, and bolsters its vertical and industry solution capabilities with the Google Cloud ecosystem
• MediaAgility’s expertise is forecasted to enable PSYS to introduce its vertical and industry solutions to the Google Cloud marketplace and enhance its end-to-end service line offerings with specialisations
• Likewise, the deal will bolster existing vertical expertise in BFSI and HCLS and add new expertise in Media, Entertainment and Gaming verticals;
• The stock reacted positively to the announcement, was up ~2.5% during market hours, building on >4% up-move during the week; YTD basis the stock has struggled (much like everything else) and is down ~9.2%

Final thoughts

• With this acquisition, PSYS has now completed 5 transactions in FY22, for a total cash outlay of USD 213 Mn (USD 151 Mn upfront and USD 62 Mn in payouts)
• The company/management guided (at the start of the year) to build out its cloud and BFSI / Payment capabilities, in order to capture the high demand scenario playing out
• FY23 will be crucial to completely the impact of these acquisitions, be it at a top / bottom line, with Q4 results and guidance key in understanding strategic vision going forward, and as a means to justify lofty valuations

Keep a track?

Around the World 🌎

• Meme stocks to the rescue – Hycroft Mining Holding Corp. caught the eye of meme-stock traders and AMC Entertainment Holdings Inc.’s CEO weeks after being on the verge of bankruptcy and eventually led the movie theatre giant to take a stake of 22% in the company justifying it as a ‘bold diversification move’. The commodity boom post the war has sparked interest in these companies that could benefit wildly from volatility. Shares of Hycroft surged (jumping as high as 96%) on Tuesday morning after the investment was announced, while AMC finished 6.8% higher for the day
• No stopping the startup wave – In spite of global market volatility, Indonesia’s biggest startup GoTo Group filed to go public seeking a valuation of nearly $30 billion making it one of the world’s five biggest initial public offerings so far this year. The company offers ride-hailing, e-commerce, and financial services and is backed by Google, Tencent Holdings Ltd. and Temasek Holdings. The only good news? Indonesia’s overall stock market has outperformed rivals though the company also plans to pursue a second listing mostly in New York
• Stocks back after oil subsides – A retreat in oil prices (now at < $100 a barrel) helped calm investor concerns about rising inflation and a subsequent pullback from the MPC. The Dow Jones Industrial Average advanced 599.10 points (1.8%) while the S&P 500 climbed 2.1% to 4262.45, and the Nasdaq Composite added 367.40 points ~ 2.9%. A major reason for this fall is a potential drop in demand following Beijing’s Covid-19 lockdown

Global Economy News

US Fed undertakes rate hike 🇺🇸; what’s up and what do you need to know

• The OG and Numero UNO federal reserve raised interest rates by a quarter percentage and signaled six more (damn, 7 in total) such rate hikes for the coming year, launching a campaign to tackle a 4 decade high inflation number, even at the cost of growth (🤦🏼♂️)
• The S&P 500 was down ~1% during market at the announcement of this news;
• Policy makers, led by Mr. Powell voted 8-1 in favour of raising rates, from a target range of 0.25% to 0.5%, a first such increase since 2018
• Likewise, the reserve also indicated a plan to begin shrinking its USD 8.9 Bn balance sheet at a coming meeting (vague)
• Officials indicated they see headline inflation at a higher 4.3% this year, but reducing to 2.3% in 2024, albeit at the cost of growth shrinking to 2.8% from 4%

What about back home? 🇮🇳

• CPI inflation has hit an 8-month high at 6.07%  crossing the upper tolerance limit of the RBI ( food inflation rose 5.9% YoY though it fell for the third-consecutive month + vegetable prices fell mildly +  energy inflation was up by 0.9% MoM)
• Core inflation (ex-food, fuel, and intoxicants) moderated further to 6.05% (vs 6.2%) driven by a sharp sequential gain in personal care (mainly gold), education doubled (0.4%) and housing prices momentum sustained (0.6%)
• WPI inflation surged 13.1% in Feb’22 (Core WPI rose 12.7% vs. 11.7% in Jan’22) with a sharp sequential surge, led by fuel & energy – food prices posted mild sequential gains as opposed to retail food prices
• IIP grew 1.3% in Jan’22 vs. an upwardly revised 0.7% growth in Dec’21 (up only 0.7% from the pre-pandemic levels) with weakness seen in segments like Electrical Equipment (-11.2% MoM), Pharma (-7.2% MoM) and Food products (-3.7% MoM)

What’s next?

• CPI inflation is likely to remain > 6% in the near term (with Mar’22 at ~6.3%) with the energy shock uncertainty persisting (though historically the pass-through of global oil prices is partial, with fiscal/OMCs bearing part of the burden)
• The direct impact with full pass-through could be >  55bps, with an indirect hit of ~ 35-40bps (even with a partial pass-through CPI should average at 5.6% with an upward bias amid the shock-absorbing nature of Government fiscal and OMCs)
• Food inflation is a key indicator to watch out for i.e production/input cost and edible oil increases as well as inflation push-and-pull factors and their impact on the MPC’s reaction function

Finally?

• Taking cue from the US Fed, the RBI has thus far refrained from raising rates, maintaining growth agendas in the process
• With headline inflation numbers ballooning, and limited respite in the near term, is there a change in stance?

ICYMI 🤭

Trading & Investing Machine….Loading 🤑

Hi there,

I’m Raunak, Founder of FinLearn Academy and author of Morning Toast. As a valued member of the FinLearn Community, I write to you to bring your attention to a new product that we’ve been working on.

Trading & Investing are action oriented activities, and developing an ‘eye-ball’ settings, and muscle memory is key to building proficiency. Education today is centred around content (video, audio, text), and that tends to turn us into passive listeners, rather than active learners. Let’s change this!

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What else caught our eye? 👀

LIC lags behind its private counterparts

• Business growth at LIC has lagged behind substantially compared to its peers with only a 0.24% growth in new business premium to ₹1.56 trillion in the 11 months of FY22
• Private life insurers registered a 24.7% rise (to ₹98,213 crore) in the same period – SBI by 25%, ICICI Prudential Life Insurance by 18% and Max Life Insurance by 16%
• With the IPO coming soon, LIC has recorded one of its worst years (even though it is larger and older) and is struggling to retain market share

Many state-owned companies are enjoying the hikes

• Profits at many state-owned companies (like GAIL, Hindustan Zinc, Hindustan Copper, and Nalco) have gone up post a commodity boom due to post-pandemic recovery and geopolitical tensions
• The government’s dividend receipts now stand at ₹53,412.2 crore (vs the budget estimate of ₹50,027 crore) though production linked costs have also increased
• Rising realizations (due to the rising prices of base metals such as aluminium, copper, zinc, lead, nickel, and steel) have helped metal companies tremendously by  boosting operating performance and profits, and thus leading to better dividends

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Educational Topic of the day

Coupon Bond

A coupon bond is a type of bond that includes attached coupons and pays periodic (typically annual or semi-annual) interest payments during its lifetime and its par value at maturity. These bonds come with a coupon rate, which refers to the bond’s yield at the date of issuance. Bonds that have higher coupon rates offer investors higher yields on their investment.