Persistent Systems Ltd.’s shares fell to a low point of around ₹5,666 from around ₹5,875 on Monday. At one point it was down as much as 3.47% and it did not come back up much.
Board to Take Fundraising On September 2
The most immediate cause of Persistent Systems' stock slide is Persistent Systems' board meeting on September 2, 2023, to discuss how to raise capital.
The company is examining fundraising through debt instruments as well as equity routes. Debt options include external commercial borrowings (ECBs) and non-convertible debentures (NCDs) and equity fundraising could include a Qualified Institutional Placement (QIP) or preferential issue.
Indeed, the company has not yet disclosed the final amount to be raised or the structure of the proposed transaction. That will be discussed during the board meeting.
Why Investors are Scared?
To raise funds through a QIP has raised concerns about equity dilution. A QIP allows a listed company to issue fresh shares to qualified institutional buyers, but issuing additional shares can dilute the ownership percentage of existing shareholders.
So investors may be wondering whether the benefits of the capital raise will outweigh the dilution impact. The market reaction suggests some investors are holding back until the company clarifies the size, pricing, and purpose of the proposed fundraising (see Appendix).
The debt has also attracted attention. Borrowing more money may increase the interest and financing costs and debt payments -- especially if a firm is already looking into a big deal that is already an acquisition.
Nagarro acquisition is a source of funding threats for shareholders
Persistent Systems has developed a very aggressive acquisition-based growth strategy. Recently the company announced a deal to buy Nagarro, a Germany-based IT services company for $1.4 billion.
The acquisition is financed in part with a $1.6-billion bridge loan, which will add to Persistent Systems’ interest costs. Market participants are thus keen to see how the company manages its balance sheet following the acquisition.
Such a fundraising might give the company much more financial flexibility to its prospects but investors are also pondering the cost of capital raising.
Strong Business Performance Offers Some Support
After Monday’s sell-off, Persistent Systems has continued to be business as usual.
The company posted a 13.67% sequential increase in consolidated net profit to ₹483.04 crore for the three months ended June 2023 (HDFC Securities) quarter. The company also secured major contracts including a $650 million long-term contract with a US client, and that is helping visibility in revenue.
An emphasis on AI-led client engagement is one of the reasons for the growth outlook of the company.
Persistent Systems' stock had been up considerably in recent months. We find that the shares had rallied about 31% from the 52-week low at the end of June and were stronger than the BSE Information Technology index during the same period. The stock had been bolstered by optimism about the Nagarro acquisition and good deal wins and the company’s AI strategy.
What Investors Should Watch Next
The September 2 board meeting will be closely watched by the market. Investors will want clarity on the total amount to be raised, the mix between debt and equity, the pricing of any QIP, the intended use of funds, and the potential impact on the company's balance sheet.
The fundraising could help Persistent Systems to grow longer term if the capital is used efficiently to integrate Nagarro, fund growth, and strengthen the company’s global technology capabilities. But higher debt and interest costs may weigh on profitability in the near term.
The company’s management will need to show that the additional capital can generate enough returns to justify the financing costs and any dilution.
That Persistent Systems shares are down more than 3% in the past week is more a reflection of investor uncertainty rather than a deterioration in the company’s core performance. The stock’s next big direction will most likely be the outcome of the September 2 board meeting and the market’s response to the proposed fundraising strategy.
Disclaimer: This article is for informational purposes only and should not be considered investment advice. Investors should independently evaluate the company's financials, valuation and risks before making investment decisions.
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