Good Morning Toasters!

Hiii friends!! Happy weekend and happy resting. The Nifty50 was up 2.65% during the last week, with heavyweights contributing to the index closing the week in green. A fall in oil & commodity prices has helped assuage inflation concerns, keeping the mood (relatively) buoyant during the week.

In today’s issue, we look at past major financial events (Global Finance Crisis, Covid-19) and their correlation with IT Sector / Stock performance in the lead-up to, during and post. The IT sector has a direct linkage to US / Global GDP growth, with IT Sector spending expected to double in the coming decade.

Adda52, an online poker platform filed its DRHP last week (yess in this market), aiming to raise INR 300 Crores in fresh capital. Owned by India’s online listed casino player Delta Corp, Adda52 competes with poker & rummy platforms, and real-money sport fantasy platforms like Dream11.

And finally, we’ve started a rollout of our newest product, Trade:able, that aims to democratise trading, via a unique and fun learning experience. There are a bunch of amazing rewards and prizes to win. Click here to know more.

Market Watch

Nifty 50: 15,699.25 | +142.60 (+0.92%)
FII Net Sold: INR 2,353.77 crore

Sensex: 52,727.98 | +462.26 (+0.88%)
DII Net Bought: INR 2,213.44 crore

Industry News

IT stocks are down ~25% YTD on the back of recession fears; what’s up and what do you need to know?

Walk down memory lane

• Indian IT Services businesses witnessed stupendous growth during FY02-12 (~25% CAGR / 9x expansion) on the back of growing adoption of offshoring, and expansion in service offerings (Business Process Management, Transformation etc.)
• Post a strong phase of growth, the Indian IT Services industry was (until the pandemic hit) in a consolidation phase, as companies began offering services beyond outsourcing (think: cloud, big data analytics, AI / ML etc), coupled with a deeper focus on margins
• As new products entered, companies overall growth reduced from the mid-20s to sub-10% CAGR between 2012-22, as new businesses exerted deflationary pressure on existing businesses
• That’s until the pandemic hit, and IT companies got the boost they needed, with industry growth rebounding in FY22 on the back of an uptick in tech spending, adoption of cloud and digital technologies, digital capability expansion and a low base

Cloud, Multi-Year Transformation Journey, Digital Adoption

• Digital Transformation is expected to be a long-term secular growth driver that has been further accelerated by the pandemic, with cloud & digital irreversible trends, with the peak of the pandemic providing ample evidence of the benefits of remote work, digitisation and cloud
• Next-Gen services are expected to see a 16.4% CAGR to USD 900 Bn by FY25 and drive ~7% CAGR in the overall IT Services market over FY21-25E (See image below)
• Tech Spends as a % of GDP has consistently grown since CY11 (up from 4% to 4.9% in CY20), with management commentary of global companies indicating a doubling of the current 5% levels over the next decade

Okay cool! So there’s high demand and scope? But what about the impending fears of a recession? Stocks are down ~25%? Any context?

TWITCH – Tech Mahindra, Wipro, Infosys, TCS, Cognizant, HCL

• Tech spends have exhibited a high correlation with US / Global GDPs in the past; a case in point is a slowdown in TWITCH revenue/growth a quarter preceding the Global Financial Crisis, with BFSI (high-value clients) reducing spending in anticipation of struggles
• The recovering revenues for TWITCH companies were equally swift, once the US GDP began to show initial signs of recovery; likewise, stocks tumbled as numbers dried up during the start of the pandemic, and rebounded in equal measure once companies begin multi-year transformation journeys
• Past experiences suggest a mild recession scenario may lead to a loss in revenue for a year, but the trend growth is likely to be regained over the next 2 years (see image below)

Interesting! Anything stock specific? Final thoughts?

• Global Financial Crisis –
  • The Nifty IT Index dropped 40% in 2 months in anticipation of a recession, with the 2 Yr FWD PE dropped by 20%, with the index dropping another 15% during the recession
  • in equal measure, the Nifty50 was down 9% in the run up to the recession, but fell ~30% during the recession
  • And lo & behold, the Nifty IT index rebounded by 150% from the lows of the recession, with the 2 Yr FWD PE up 110%, and followed this move with another 15% recovery in the 3 months post the recession (see image below)

• Covid-19 Pandemic –
  • In a similar fashion, the Nifty IT Index was down 7% initially due to the worsening of global healthcare, followed by another 30% in a month (because of the pandemic)
  • The index made a 100% recovery during the 9M after as companies began multi-year digital transformation journeys, with another 20% recovery after
  • Nifty followed a similar trajectory, initially dipping by 10% and 30% (during the pandemic), followed by ~70% recovery from the lows, and another 10% recovery in 2 months
• Data from past cycles indicate early stage recessions have proven to be good opportunities to find value and risk-reward or investments in the IT Services sector

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Around the World 🌎

• Netflix enters the ad race – Netflix is looking to launch an ad-supported version of its platform, and is looking for partners (potentials include NBC Universal and Google) to bring this to fruition, with plans to eventually build up its own ad business. The ad experience is meant to be “more integrated and less interruptive” than traditional TV advertising
• Good time for FedEx – Q4 saw revenue for FedEx grow by 8% as higher shipping rates and fuel surcharges offset lower shipping volumes.) operating income rose 6.7% from a year earlier to $1.9 billion with net income including a tax benefit of $46 million. Supply-chain disruptions, slower economic growth and a tight labour market continue to plague its core business
• Zendesk sells itself – Zendesk Inc is very close to cracking a deal selling itself with PE groups like Hellman & Friedman LLC and Permira, It has a market value of ~ $7 bn but very recently rejected a proposal for $17bn. Shareholders also rejected its $4.1 deal which involved the acquisition of SurveyMonkey-parent Momentive Global Inc

Company News

Online poker company Adda52 files IPO prospectus; what’s up and what do you need to know?

• Owned by India’s only listed casino operator, Adda52 is a fully owned subsidiary of Delta Corp, the once fabled stock of the big bull himself (Mr. Jhunjhunwala)
• Acquired by Delta Corp six years ago, Adda52 is an online poker platform, in addition to running other games like Rummy and fantasy sports; ~90% of revenues are still generated by the poker
• In what was a natural hedge for a pure brick & mortar business (Delta has offshore casinos in Goa, Sikkim), the deal reportedly valued the Adda52 at INR 150 Crores
• Revenues have tripled between 2016 – 2022, growing from INR 47 Crores to INR 137 Crores, with a commission per player model, ranging between 3-5%, depending on the buy-in, while also delivering steady profits, barring the most recent fiscal

Interesting! Tell me more?

• And yet the company’s struggling, with a combination of increased competition, changing user preferences, saturating markets affecting growth, as new user acquisition has slowed, impacting revenue & profitability
• While typical competitors would include players like Spartan Poker, PokerBaazi and Pokerstars, Adda52 now also has to compete with multi-game offering companies like Mobile Premier League and Winzo
• In addition to virtual cash, Adda52 is now also competing for screen time with the likes of Dream11, who have successfully managed to combine real-money with fantasy sports with Adda52 attributing the IPL & T20 world cup to a diversion in wallet share
• And to arrest this growth, and continue to acquire users while growing profitably, the company plans to raise INR 300 crores in fresh capital, in addition to an INR 250 crores offer for sale (promoters encashing)

So increasing competition and slacking growth? Anything else?

• Real-money gaming, according to the DRHP field, is one of the more sensitive industries in India, with legislative and judicial action in the past, termed ad-hoc, and is often viewed as risky & highly uncertain
• At the moment, due to a lack of central legislature, states have the freedom to regulate the practice, allowing/disallowing the services within their jurisdiction
• In addition, Delta Corp (the parent company) and Adda52 are like chalk & cheese, with very limited binding between the two organisations; the initial plan of using profits from Delta to expand operations at Adda52 did not particularly pan out, eventually leading to the company accessing the markets and forming an independent identity
• To make matters worse, one of Delta’s biggest shareholders and the OG Investing Guru has recently unloaded his stake, reducing it from ~7.5% to ~1.2% in the last week
• IPOs are a thing of the past (😝) with current market conditions unlikely to see any companies launching issues; if & when Adda52 does decide to launch, it will set precedent for the other startups (Dream11, MPL etc.) on the reception of real-money fantasy platforms

What else caught our eye? 👀

Pine Labs wants to become stronger

• In a bid to strengthen its online payments and lending platform, Pine Labs has acquired fintech infrastructure provider Setu for $70-75 million
• The main attractions were Setu’s “interface for account aggregator, open network for digital commerce and open credit enablement network framework”
• Pine Labs has been looking to diversify beyond merchant payments and was last valued at $5 billion

The Indian Oil Saga ft. Russia

• Imports of oil from Russia to India have climbed 50 times since April, and the former is now among the Top 10 suppliers to the country
• Russian imports now account for 10% of the total imports baskets vs 0.2% prior to the war with Ukraine
• With ~ 25 million barrels being purchased in May, around 40% has been bought by private refiners namely Reliance Industries and Rosneft-backed Nayara Energy

Educational Topic of the day

Block Trade

Block trades are privately negotiated futures, options or combination transactions that meet certain quantity thresholds and are permitted to be executed apart from the public auction market.

Edited by Raunak Karwa

Let’s connect, I always love hearing from you. Hit me up at Raunak_Karwa on Twitter or Raunak.karwa@finlearnacademy.com