Thanks for your quick response. I totally see your point. As an employee myself, I would support equity sharing with employees for a long term commitment from both sides.
Actually one off sounds a little more doubtful on intensions and very difficult to account for in company’s valuation vs a logical trend with a history and predictability in future (say 10% -20% of the profit will go towards employees YoY, no prob). But all of a sudden diverting ~50% profits towards this is not making any sense.
Secondly, how do you know, if employees benefiting would include top 200 - 400 in a 1000 people company or only just top 2 - 4?
Gyan, I am also concluding that there is no way to find out the use of the cash from theq1/q2/q3 for 2013-14 results.
The 15 crore transferred to the welfare trust has a note that says “Recoverable in cash or in kind or for value to bereceived”. Don’t know what it means. You could call the company and ask about it.
85% revenue is from Americas. Maybe 80% revenue is from one client ? Who knows - there is no mention of it. However, if you look at TCS annual report, they have full details of how many clients are there for each revenue bucket (say, 100 million USD clients, 10 million USD clients and so on.).
For Visa (assuming they are their main client), RS software may be peanuts. But for RS, Visa may be everything. That is a dangerous partnership to be in.
The payments are also gradually moving beyond credit cards - Google wallet etc. It’s hard to imagine how the payment world will be 5 years down the line.
It’s hard to imagine RS as a safe investment. If you can understand the relationship between the big client and RS, why they won’t swap out RS, why they will continue to increase business with RS then it may be a different game. But, how do you get that information ?
It’s not a normal services company that we know of - Number of people x Billing rate, serving a wide variety of industries and clients.
USD is almost at all time high and IT is the hot industry now in Lynch terms. What if USD drops by 10% ? The profits for these companies will drop and PE could get decimated. We could say at 5 P/E we have nothing to lose but I still prefer to understand the risks of RS clearly before investing.
Surprisingly found a very big and prominent picture of “Raj Jain, CMD, RS Software (India) Ltd” in a prominent article of Business Today mentioning Raghuram Rajan, Aditya Puri etc. Could this be perhaps the reason for the sudden attention and spurt in this Stock?
I am not that familiar with the software companies outside persistent and infotech. Given that the payments vertical is of specific interest I did some checks with industry players i.e other software cos…people mention that they have heard of the Company / promoter but none of them have interacted with them or bumped into them or their employees or while canvasing for business during their long careers.
Also there is an obsessive focus on market cap / stock markets in their annual report…which is generally not a good sign. There is also an item relating to share forfeiture - on warrants allotted by paying 10% of application money.
While Ramraj on their board is a familiar name…have drawn a blank on the other names on their board.
RS Software has come out with excellent fy 14 results. eps of around 42 per share. Promoters have hiked their stake to 38% post conversion of warrants.
Technically stock has broken out of a cup and handle pattern on monthly line charts. target is around 280.
details given on chart.
disc: bought recently post announcement of results
Hitesh, thanks for your update, have invested in this stock for a while (2.5 years, from Rs 60), your endorsement only reinforces my confidence. They have improved a lot in last 2-3 years in every respect however though the biggies like TCS have grown much faster in last couple of years, their pace of revenue growth has been little bit disappointing. They have decent technology and claim they have verycompetitiveadvantage in e-payment area but very few, concentrated client list. Profits are not shared with shareholders well either. Have kept the cash idle for many many quarters now. Did you buy? if you did you would have for very good reasons. Or just a trading based upon technicals? Just curious to know.
In the course of this year, we have done some excellent strategic work with one of our major stakeholders in acquiring processor in Europe. That particularly is responsible especially in Q4 to contribute to larger growth and this is expected to continue for the next several quarters to come. Your profitability has swelled up in this quarter as well, around Rs 16 crore that is primarily on the back of lower tax expenses, why was that tax lower in the past quarter and what is the trajectory going ahead? A: As a matter of fact, the tax allocation on a quarterly basis - if you see our first few quarters did have a larger allocation and then the provisions being on the higher side, they were finally adjusted during Q4. The tax liability has reduced and therefore resulted in a disproportionately higher profit after tax (PAT). But if you look at our operating margins, they also continued to improve and for the fiscal year, we have improved our operating profits by 56 percent.
I had bought RS Software as a techno funda bet. Good fy 14 results coupled with a good cup and handle pattern as posted above seems like a potent combination.
There are chances of re rating in this company from current levels as market participants slowly get convinced about the prospects of the company.
They hold close to Rs 48 per share of cash as per the latest Sunidhi report. Going through the fy 13 AR, they had mentioned that they intend to grow organically as well as inorganically. So they might be keeping some cash to look out for some acquisition.
Another aspect of this company is that looking at the niche presence some biggies in the space might find it attractive to buy out RS. (a la Kale) Although this should not be the investment thesis.
Company has grown its revenues at close to 22% cagr and profits at 53% cagr in last 5 years, is debt free and has good return ratios. The only snag seems low dividend payout ratio. If that somehow is addressed, this could provide decent returns going ahead.
Thanks for your detailed note. One thing I’ve learnt from Ayush is to figure out if the company could be fudging it’s numbers by looking at (a) tax rate; (b) Dividend payout ratio; If both are high the odds are low for fudging.
This is a serious problem in software companies, because it’s so easy to do. RS scores low on both the counts ((a) & (b)), If you look at FY06-12, as per screener.
What would be your hunch on credibility of the management? How would you personally get a feel for trust-worthiness of the numbers reported?
RSS seems to have started paying quarterly dividends and has paid a total dividend of 60% this year. Last 3 years div was 2, 3, 3.5. As discussed on a separate thread, early signs of corporate actions such as increased dividends, bonus, coming on TV etc is encouraging.
Analysing the company to bare bones doesnt serve too big a purpose. If the numbers are fudged then all bets should be off. But if not then there’s a real winner here.
Coming to tax payments, for fy 14 it has paid close to 30% tax amounting to around 23 crores. Thats not a paltry sum for a company with market cap of 290 crores.
Dividend as N Sood says has been increasing in absolute figures. Payout has gradually creeped up this year. Although I would have been happier if it would have been closer to 20%.
Interesting thing while having a first look at figures is that company’s revenues has grown from 149 cr in 2009 to 381 cr in 2014. Thats 3.5 times.
During same period, ebidt has grown from 18 to 83 crores which is more than 4.5 times. And net profits have gone up from 5 to 51 crores. And thats inspite of company paying tax at a much higher rate as compared to earlier. And its been clocking ROE in the range of 30-35% in past few years.
And during all this time the promoter holding has gone up from around 22% in 2009 to 38% in 2014.
If there are no cockroaches there’s plenty of steam left here.
I agree with you broadly the valuations are cheap. I believe, one has to also be very careful on position sizing here.
A few alarms I sense in this company:
(1) This company has a bad history of excessive warrants issuance to promoters and unfairly diluting minority shareholders.
(2) The above point combined with zero dividend payout ratios, also combined with super low rates, has kept PE suppressed for long. Markets just din’t trust the stock, since the combination of those three make numbers easy to fudge.Bull markets have a habit of burying promoter integrity related questions and it might as well be wise to ride the stock.
(3) The past two annual reports are excessively hyping up the company. Such language usually leave a bad feeling in my stomach. Coming from the computer science / tech field, I can say for sure some statements are lies. (We guarantee 99.99999% uptime); Compare the language with a VST Tillers (or even Dhanuka/Ajanta/PI Ind/Kaveri) - a super conservative management, that keeps expectations low and outperforms. Again compare the tone with other fudgers like Allied Digital or Shree Ganesh Jeweller or Aanjaneya Lifecare - matches closely.
Maybe I’m just over-thinking this one. But I personally will be scared to take more than a 5% allocation to this one. Would love to hear your views, and learn as always.
In my view this company is a trading bet and not an investment for long term. Ride it for some time and get off when your target is achieved.
With the right to go wrong, I really wonder a software company which has not been able to scale up during the IT boom, will scale up now. This company has been there since ages and has not been able to scale up. There are others like Sonata, Mastek etc in the same category with promises every now and then.
Disc: I haven’t looked at the recent financials at all, hence my comments are more generic in nature. I have bought this company @100 and sold @18 more than a decade back.
