RS Software - Will they pay investors too?

KP, thats good.

From the response recd, my understanding is the bottom line growth is coming because they are executing more work in India now, than before, when it was done outside India. But there is a limit to this type of cost arbitrage.

The company has never provided any information about its strategy to grow top-line. I am glad I exited at a higher price than what is prevailing today.

Bomi,

Thats exactly my concern. market is more worried about 1) muted topline growth 2) no information on client additions 3) Revenue skewness from one client and 4) Use of cash.
I think the moment company will decide to make efficient use of cash, it will get re-rated.

Disc: Invested and exited partly

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Let me try to value RS Software using the owners earnings philosophy of Warren buffett.

Owners earnings is defined as PAT + Depreciation - Incremental working capital - Incremental maintainence capex.

This is the owners earnings per share for the last 5 yars

7.43 7.59 12.89 2.96 17.05

If I were to value RS Sofware today I would assume an owners earnings of Rs. 20.95 per share.

Operating cash flow 61.05 (operating margins at around 23 percent)

)+ Other income : 7.33 crores

)- incremental capex: 2 crores

)- incremental working capital : 13 crores

Gives owners earnings of Rs. 53.57 crores of Rs. 20.92 per share.

If I were to divide it with the long term bond yield of 10 percent on a no growth basis RS should be valued at Rs. 209 crores. If I add the Rs. 150 crores cash (around 60) even if RS does not grow the minimal valuation is Rs. 270.

So clearly a case where the market has severely overreacted to sluggish sales growth.

Hi Hrishikesh,

These type of valuations are good for companies which will have predictable earnings and don’t have client concentration.

CS have already stated that 80% of revenue come from one customer. If that customer is gone all these valuations just remain good on paper

There is news of Visa signing $200m contract with Infosys to for application development and managing infrastructure for VISA. VIsa is also starting project with Altimetrik which is bangalore based company. Altimetrik is mass hiring for VISA project. Me being in software industry can 100% confirm Altimetrik news.

There have been no response from RS software management yet. But things looking riskier for RS Software.

It is sliding closer and closer to your dream mcap. :slight_smile:

@Sunil

Visa - Infosys contract news is not new. I could trace it back to Nov’14. Can’t be the reason for this immediate decline. (see link below).

This is either markets over reacting or some one knows morethan what is known in the public domain. (I hate this secretive part about this game). Does any one know the details of relationship between Visa - RS? Annual contract?

Most (generic info, don’t know about RS) of the software service outsourcingcontracts are project basis, under T&M basis, under a larger umbrella Master services agreement. It also takes many quarters / years to handover to a new team, ifat all. So nothing could change over night.Althoughits clear that RS is not able to either scale to Visa needs or not able toexpandinto more departments based onexistingrelationship.

*T&M- time and material. Simple terms paid per billed hours.

Jumped up 17% today. We should stop debating logic. :slight_smile:

I bought at 170 levels - look at FCF yield - its’ like buying a 12 % bond + cash on books and assuming a 2-3 % div yield, I cannot see too many downsides below Rs. 180-200.

the same stock was a great buy at Rs. 400 - what has changed in two months for people to run away. All of these incidents - visa setting up their own centre, infy contract do not threaten their core business - a fact I have gotten verified from people in the industry.

Be greedy when others are fearful

I listened to RS concall after Q4 results, below is a summary of some of the key points.This was my first concall, please bear with me if I missed anything.
Question is whether we can trust management to execute or not.Any one heard earlier concalls?Did he repeat the same points earlier too?

1)Revenue degrowth mainly due to higher off-shoring , 60:40 onsite offshore ratio this quarter.Few years back it was 68:32 and this year started with 65:35.[Being in IT I believe this cannot be RS policy,it must be forced by VISA]
2)185 cr cash available , 54% growth in cash.
3)RS is in advanced stages of a M&A deal with 3 companies , Raj jain is very confident some M&A will happen in 3-5 months for inorganic growth.
4)86% revenue comes from visa, earlier there was a legal term in contract not allowing RS to chase business from others but that clause was removed 12-18 months back.
5)long term contract with Visa, infact revenue has grown from visa.
6)RS Revenue took a hit due to ROW revenue going down a lot,One existing client declared temporarily freeze of work and floated a new RFP.RS hoping to
restart that work towards end of this Year.
7)Raj jain mentioned they need time to get into new clients and mentions next 5 years will be very exciting.
8)Mentioned a lot of points about Apple pay/samsung pay/tokenization etc.

Thanks,
Anindya

Few More points

9)They are now planning to diversify into Europe and Indian Market.90% cost of sales team is for new client finding .(not sure which 90% he mentioned)

10)They may launch something for indian market 2nd half this year

11)They are targetting startups as well as grown companies

12)9 clients working with RS and total 40million $ deal pipeline

RS is heavily dependent on Visa for its revenue.

Visa has started its own center in Banglore.

Heard from a friend who recently attended an interview with them that they are aggressively ramping up.

Importantly, they are also moving some of the work from vendors to their own center in Bangalore. They are also getting engineers from the vendors to join them.This could have a -ve impact on RS going forward unless RS can ramp up on the other sources of revenue.

Would be good to check with management on this.

Disclosure: Analysing the company. Not invested.

Anyone knows why the tax for this quarter is highest ever at 9 Cr ? . If I extrapolate this, tax for the next year could be 36 cr (Highest ever). Combining it with decreasing Sales , may be the profit will be compressed in FY16 ?

Hi,

have following observations/concerns. Would be great if someone has any inputs on the same.

  1. In Q4 concall, MD says we have 183cr of cash but BS only throws a number ~147cr?
    no line item for taxes paid in cash flow statement

  2. Sum total of costs in 2008 P&L is incorrect. But it is material as it results in profits instead of minor losses

  3. Outstanding Shares increased from 49l in FY06 to 74l in FY07, no accompanying commentary

  4. Poor accounting disclosures given the level of disclosures in other IT companies such as Mind Tree, Persistent etc. Annual report seems to be highly focused on investor community - this could have been good had they given enough/relevant disclosures but things like ‘market cap and P/S ratio’ shown as indicators of sound business in the annual report really turn you down.

  5. very low delivery volumes in the script

  6. Warrants to promoters and low dividends is disconcerting as well

  7. Annual report only talks about high growth nature of payments industry and how RS will benefit from the same. But there is no effort from management in talking about why real growth (in dollar terms) of company is very poor for last few years. In FY15, they saw de-growth. All this puts a question mark on quality of communication from management? In FY12, dollar revenues were not reported at all.

Best
Rajat

@armchairinvest_ These are all good points.

Disclosure: Long.

My 2 cents on this are:

  1. The e payments space has massive tailwinds - which is what the management keeps harping on
  2. The delivery percentage seems low on the stock but is still higher than the market average:
    http://www.igvalue.com/2015/02/has-advent-of-internet-moved-cheese-of.html - This article as a graph of the delivery percentage on the NSE as a whole. Unless the NSE and BSE cross volumes were massive this is not likely to be very far from the truth.
  3. Company so far has grown largely organically. If they are able to do some good acquisitions they might be on the right path. The smaller IT companies focussed on a niche have lots of trouble breaking in to the big league. Acquisitions is one way for them to do it.

My review of the stock from back in the day is at: http://www.igvalue.com/2014/12/rs-software-review-from-23-apr-2014.html

Cheers.

Hey Kunal, agree with you, no clarity offered by the management, had recently sent mail to the company with similar questions and all I received was gas (from the same guy, Vijendra).

On 27th April I wrote:

Dear Mr. Surana,

I am Sampat Bhansali an investor. While looking for companies with high ROE & ROCE I came across your company. Was surprised to see low PE for such a high performing company, on further research I found the company is completely depended on 1 client - VISA, also found that despite high cash balance the company is neither shown intent to give direction on how it would like the cash to be deployed, nor it has given it back to investors via dividend, any specific reason for the same.

Also I understand that the revenue are falling and whatever growth we see in last few quarters is because of the rupee appreciation.

The Management is not vocal about the future of the company, request you to throw light on revenue growth, margins, employee cost (which recently went down in a big way) utilization of cash balance for the next 5 years

I received the following response:

Thank you for your mail Mr Bhansali.
Company is looking at appropriate opportunity to acquire a company which blends with the domain focus.The company intends to utilise available cash for such an initiative which will enahance the top line/ bottom line of the company.
Regards
Vijen

Next I wrote:

Thanks Mr. Surana for your response. Can you also throw some light on your dependence on 1 client - VISA, who have set their shop in Bangalore. How much will it impact your topline and what is the companies plan to mitigate the risk.

and he replied:

We cannot talk any customer specific as we have certain confidentiality requirements. Hope you would appreciate that.
But at a generic level , this is part of any business and a large number of MNCs have opened their captives in India to reduce their in house cost. This necessarily do not impact their outsourcing business substantially.

Regards
Vijen

I don’t understand when are they gone use the idle cash and why are they not using it. If they are not getting the right match why don’t they payback to investors.

Yep - the cash has been a big concern for a while. And they keep talking about an acquisition. The question is whether they will ever be able to diversify that single customer syndrome.

I have been looking at RS software for a while now and did the following :smile:

  • checked every single review on glass door
  • watched all videos/conf calls

in a single vendor situation, if a vendor is making 27-28% ebitda margin, clearly the vendor is doing some high end work as visa too knows that they can squeeze them. From the reviews, it is clear that RS does things like application integration, programs for chargeback/disputes etc. which are critical for visa.

Q1 is typically the best quarter for RS and given the huge operating leverage and FCF yield - ex cash is about 25 % - approx Rs. 60 Cr. on Rs. 300 Cr. ex- cash, even small revenue growth will get amplified on bottomline.

I just wish raj jain took some leaf out of MPS’ book and diversified revenues and gun for growth. The best may be for RS to get sold to a larger player - owner’s earnings would be much higher than what is being appreciated by the market - for such a profitable biz someone can easily pay upwards of 2 x CMP given strong FCF and domain focus.

`varadha- single client concentration is the only reason for such low valuations. As you rightly pointed out if they can diversify their revenues - stock will be multibagger. Do you find any green shoots here?