RS Software - Will they pay investors too?

srisaurabh2000 · October 19, 2011, 5:05am

I came across RS Software in businessworld where they were listed in the high ROCE cos. list. Had ignored looking earlier but they have been hiring consistenly specially in Oracle Apps that I’ve seen in ads etc.

RS Software is a Kolkata based IT company focussing on electronics payment domain. They have their own products which they sell as solutions. From what I have gathered they have their own 9 floor building in Sector 5 Salt Lake, Kolkata.

Some of the clients they have served is Visa, Visa EU, Visa CEMEA, Maclane, Pemco, Vignon.

MCap ~ 61 cr.

CMP 57.50

P/E 2.49

TTM EPS 22.94

BV 43.97

Div Yield 3.58

EV/Sales .23

EV/EBITDA 1.38

Yearly nos.(consolidated)

FY07 FY08 FY09 FY10 FY11

ROCE 23.71 12.06 27.3 44.11 68.59

ROE 22.17 2.61 18.55 41.79 57.08

Sales 101.67 100.36 149.57 166.47 199.27

NP 4.46 0.74 5.23 11.94 22.33

EPS 6 0.99 6.83 14.72 19.91

Qtr numbers(consolidated)

Sep-11 Jun-11 Mar-11 Dec-10 Sep-10

Sales 64.71 56.51 53.02 51.41 49.98

NP 6.3 5.01 6.9 6.43 4.95

EPS 5.71 4.54 6.26 5.83 4.47

Emp cost 42.48 41.69 35.87 32.41 33.29

Key positives

Became debt free last fiscal and also paid a dividend.

As of Sept, good reserves and surplus of 48 cr, cash of 4.66 cr, net current assets of 53 cr. and investments of 3 cr. This is against a market cap of ~61 cr. If the numbers are not cooked then these numbers seem quiet good.

PE, EV/SAles, EV/EBITDA, MCap/Sales are quiet low and to me it looks a value buy at this stage.

Margins have improved last few years with NPM in FY11 at 11.21 and OPM at 16.42.

Free cash flow of 15 cr. was generated in FY11. This also has been increasing last few years.

The return ratios are impressive and have grown in the last few years.

Negatives

Dependant heavily on a single client Visa. Visa is served by CTS and IBM also in this domain. RS Software’s relationship with Visa is 19 years old

Low promoter holding at ~ 28%. However the promoter has increased stake by buying from mkt in Sept this year.

Any other???

Other info

The core group of the company sits in US, am not aware of any corp. governance issues. Though in 2000 the stock price had been quiet high and after that has always been in a range in the last 8-9 yrs.

These are the only 2 reports I’ve come across:

They had done a tie-up with Microstrategy for analytics last year.

They have developed a payments lab where prominent people from the payments domain have visited. In India the key driver for mobile can be if RBI promotes it and can benefit RS software.

Would appreciate any inputs here. I’ve bought some at ~ 55 levels. The numbers look too good to me.

srisaurabh2000 · October 19, 2011, 5:29am

Another pertinent data point I missed was that promoters stake has increased from ~19% in Mar 2008 to 28.62% in Jun-11 and shd be around 30% in Sep-11. Sep-11 shareholding numbers are not avlb on BSE website.

srisaurabh2000 · October 31, 2011, 7:07am

Some more info from digging:

They have set up a payment lab in Kolkata and are focussing on mobile payments. From what I gather there is a solution here that they are working on which has patent pending.

Their engagement with Scott Loftesness would be regarding, he is considered an expert in this domain. Last year he had visted the lab in Kolkata.

The CEO has shown intent that they would like to work with RBI(Reserve Bank of India) in the mobile payment area. They have consulted RBI in the past.

The dependance on Visa is high but they have developed solutions like

Gift & Loyalty

Risk Modelling

Residual Management

Merchant Boarding

Business Intelligence

Data Analytics

Data Warehouse

There are folks who have implemented the Residual Solution which is mentioned in AR 2009. This is probably a moat which separates them from the regular services company. Though they do maintenance and other development work for clients.

They have 2 subsidiaries-

Responsive Solutions Inc - This does software services outside the payments domain

RS Software Pte Singapore - Opened last year to focus in Asia last year

There seems to be hiring on for onsite and offshore to be closed by 10-Nov and 31-Oct respectively:

http://www.rssoftware.com/root/open_positions_onsite.asp

http://www.rssoftware.com/root/open_positions.asp#pay_space

Raj Jain had been president of NASSCOM in 1999.

The stock might not have moved in the last few years because early investors like WBIDC etc. would have exited and hence liquidity might have been high. This is again a guess, I might be incorrect here.

Found a reco from Ventura Securities from Sep-2010 but this looks more a technical buy.

With the cash and ROE they are generating if they are able to maintain then next year can probably see a good dividend or an acquisition both of which should augur well for the company.

srisaurabh2000 · November 29, 2011, 5:52am

Was checking Visa which is the largest client for RS software with whom they have been working for 20 yrs.

Warren Buffet has entered Visa in Sept and with retail sales being reported good in US, Visa should be a beneficiary:

The last I could find was that Visa contributed 60% of revenues but that data was for 4 yrs back. Also Visa processes 60%+ of all transactions which should benefit RS. Also RS Software is still hiring whereas there is a stop for most IT folks, some hiring is spill over from last month which could not be closed.

somu0915 · December 5, 2011, 12:48pm

[ http://seekingalpha.com/article/310295-warren-buffett-s-6-new-bullish-bets

Great Link for WB’s recent investments.

I feel that RS Software is a very small player in this field. If giants like TCS/CTSare to come to this area and sooner or later they will, it will be difficult for RS Software to survive.

We need to be watchful in this space for them to prove themselves much ahead in the race before taking the plunge.

](http://seekingalpha.com/article/310295-warren-buffett-s-6-new-bullish-bets)

srisaurabh2000 · December 8, 2011, 5:42pm

CTS/IBM as I mentioned are already vendors for Visa.

Dont think TCS/CTS would offer solutions. RS Software in any case is a niche player and they have decided to focus on electronics payment domain and hence would be better prepared than those folks. They are working on a patent pending solutions in the mobile payments area. And would be beneficiary in this domain if RBI encourages mobile payments in future.

As an example when RBI had implemented RTGS they had given it to Logica because of the solutions and expertise they had and not to a big player.

Also they are looking for accounts manager and other hires in Atlanta which implies that there is another client which is growing. I’m not aware of the client here.

TCS/CTSare

srisaurabh2000 · January 11, 2012, 11:02am

Mudar Patherya’s reco on ET Now:

http://economictimes.indiatimes.com/et-now/stocks/mudar-patheryas-picks-pitti-lamination-rs-software/videoshow/11307926.cms

srisaurabh2000 · February 1, 2012, 9:42pm

RSS declared good set of nos with

Sales up 41% from 51.41 cr to 72.36

NP up 19.1% from 6.43cr to 7.95 cr

PBT up 42% from 7.76 cr to 11 cr.

The tax paid has gone up from 1.47 cr. to 3.02 cr., this seems to be the reason why NP is not in line with sales and PBT growth. A good set of numbers.

The interim dividend of Rs. 1 was a surprise. This time they did not indicate the Assets and liabilities that they used to do. The reserves excluding revaluation reserves is at 57.77 cr. At closing price today the mcap stood at 62 cr.

The March qtr is typically the best qtr. 9 mths diluted EPS is at 17.22. They shd be able to do a 22+ for year round.

srisaurabh2000 · February 8, 2012, 7:20am

The promoter is trying to increase stake by issuing warrants for 8.2% or so. The promoter holding would go up from ~30% to ~38% if this goes through.

Not sure why they are not trying to buy from open market instead of issuing warrants. Though they have issued warrants in the past, at that time there was debt in books and the money was to retire that.

The situation now is that it is a debt free, dividend paying company. And hence this does not seem good corp governance.

http://www.bseindia.com/xml-data/corpfiling/AttachLive/R.S.Software%28India%29_Ltd_070212.pdf

srisaurabh2000 · April 18, 2012, 4:37pm

RS Software posted their Q4 and yearly results today.

Q4 sales were at 70.46, a growth of 39% over last year, NP at 9.6 cr - a growth of 38% and EPS at 9.01 - a growth of 43% over last year qtr.

Yearly sales came at 264 cr from 199 cr last yr - a growth of 32.5%, NP at 28.86 cr from 22.33 cr - a growth of 29.24% and EPS at 25.71 from 19.91 - a growth of 29.13%.

The stock has been posting highs over the last few days and at CMP of 75.90 at a PE of 3 still looks pretty cheap. The mcap of the co. is 93 cr. whereas they have reserves of 76 cr or Rs69 per share, cash in hand 21.6 cr or Rs. 19.75 per share, investments at 9 cr. or Rs. 8.23 per share. They are debt free.

The dividend declared is Rs. 2 per share which implies a total of Rs. 3 in FY12 and dividend yield of 4%.

The Rest of world revenues have doubled in FY12 to 32.71 cr from 16.75 cr. which indicates growing revenues outside US which is a good sign though this is still less.

srisaurabh2000 · June 25, 2012, 2:43pm

Moneylife came with a recommendation when CMP was 67

http://moneylife.in/article/81/26540.html

The AR was out last week. A few points:

The AR in details talks about the payment industry and that the payment industry does not suffer from typical extremes of the banking industry. Also payment industry is heavily dependent on technology and hence constant investment is needed here.

Indicated they did a strategic consulting project for first time to a card network.

Indicated that the growth can be sustained due to the oppurtunities that payment industry has.

They added 2 clients, it will need to be seen how this shapes up.

Visa % of overall revenues went up by 5% which is not good but this also indicates that in absolute terms the other clients grew.

24 cr invested in liquid funds, 9 cr in MFs and 22 cr. cash against a mkt cap of 93 cr. which implies the co. is available pretty cheap. At some point of time they will have to utilise this cash so that return ratios remain good.

The reserves are at 76 cr.

They also indicated about the patent that i had mentioned earlier.

And also an emphasis on training with their payment lab and mention was there on risk mgmt on reducing dependence on single client and that 5 sales folks have been hired to beef up sales aspects.

The last 16 qtrs result stand as follows:

Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Dec-08 Sep-08 Jun-08
Sales
70.46 72.36 64.71 56.51 53.02 51.41 49.98 48.84 39.19 39.44 42.65 40.07 37.41 39.21 36.57 30.54
NP
9.6 7.95 6.3 5.01 6.9 6.43 4.95 4.06 2.61 2.61 3.25 3.23 1.77 1.38 1.5 0.83
EPS
9.01 7.21 5.71 4.54 6.26 5.83 4.47 4.48 3.22 3.11 4.12 4.15 6.1 1.62 1.78 0.9

The last 16 qtrs show a reasonable growth in revenue with decent margins being attained. The stock is cheap on all parameters still.

If the cash + MF component is removed the co avlb at 38 cr (though this is not a good argument). The promoter has been increasing stake slowly from open market as well.

Shankar · June 26, 2012, 8:40am

I have not seen the annual report of FY12. My take

1). The company is maintaining cash/ liquid investments to fund acquisitions as and when it sees some interesting opportunity. In software industry the smaller players can’t stay competitive for long, you either increase your size organically or inorganically. Larger players can always poach talent/ offer end to end solution at a competitive rate and win contracts.

2). The company had a equity base of 11. 47 cr (1.147 cr shares) in FY12. The company offers employee stock options every year. In July 2009 - 298,500 options; July 2010 - 105,100 options; 2,000,000 options the next year. This would lead to dilution. Employees can convert 25% every year while directors 100%.

The implication is that even if Net profit increases due to increase in number of shares the EPS might get diluted. The number of options being granted is very high ~20% equity.

I look at this company favorably, but for point 2 above.

Regards

srisaurabh2000 · June 26, 2012, 7:20pm

For 2. this is from the notes:

Share options
There were no options granted during the financial year to subscribe for unissued shares of the Company.
No shares have been issued during the financial year by virtue of the exercise of options to take up unissued shares of the Company.
There were no unissued shares of the Company under option at the end of the financial year.

My understanding in case of ESOPs is that they get exercised only if the price moves up in future. And hence should not be a point of worry plus they also bring in cash.

For 1. I think we might have to wait and see. If there is no acquisition or buyback then the cash might remain idle till the promoter has hiked his stake to a higher levels and only then the higher dividends will kick in. Also I cannot name folks but they also have employees from who have joined the big 4 e.g. TCS from whom a senior person joined in US, Wipro etc. Large players are there but inspite of that RSSOFT has grown in Visa as is evident from their last 16 qtr results. This is primarily due to engagement of payment domain specialists and investing on training here.

With the dollar in favour I guess for now those things can be kept in backburner :). Even if they are able to maintain their old dollar revenues the growth will come in due to favorable dollar.

srisaurabh2000 · July 12, 2012, 4:39pm

RSSOFT has done an excellent Q1 results. This is typically their weakest qtr.

Yoy, Revenues up from 53.32 cr to 80.06 cr a jump of 50.15

NP up from 4.9 cr to 9.58 cr a jump of 95%

EPS up from 4.44 to 8.39 a jump of 88.96

The AGM is tomorrow, will be attending it.

From the looks of it looks like some of the mid cap and small cap can do well as contra bets. In terms of ttm PE this again has come below 3 now.

Maheshcm · July 13, 2012, 2:08am

Saurabh, I have couple of questions if you could get an answer from management would be great.

1)This quarter their employee costs have shot up more than 15% compared to just a quarter earlier, would like to know if they have added lot of people(for a new client ?) or have they raised salary? their NP margins are already below industry average inspite of bieng very niche player.

2)Also plz find out more about geographic revenue concentration easing if planned.

3)Plz findout efficiency ratio, their revenue doesnt match with headcount, they are nearly 900 people company.

Appreciate if you could share AGM minutes here.

srisaurabh2000 · July 13, 2012, 3:12pm

Attended the AGM.

There was a big attendance and there was normal tamasha for coupons, gifts etc. etc.

Apart from me not many questions on business were asked. Didn’t get much info as there were no direct answers to my questions. e.g. I had asked about MAT impact on tax but didn’t get any clear answer. Or if there was any freeze on hiring, next year projections/expectations , names of the 2 clients(Only 1 was mentioned First data global) etc. etc.

There were few points made which I feel are important to assess - 1. They mentioned that they will easily do 50% better than NASSCOM estimates of IT growth which implies 17-18%. 2. The sales team has been making calls to US,UK and are working hard to get new clients. 3.They want to get as much work without worrying about onsite/offshore ratios etc.4. Work in they payment domain is regular specially since Goverment regulations drive them. Mr Richard Launder spoke on payment domain on my request and he indicated that for example in one of the other cos. he is a board member in the payments domain - there is a project to ensure that ATMs in games village do not run out of cash. And he made the point that RS Soft should be able to do sustained growth in this field.

I could not catch the mgmt on dais or sidelines as the mgmt made a quit exit. There were too many folks who had come for gifts and it seemed a prudent thing to do.

An old investor indicated that Mr Jain had not taken any salary during the bad period. And had fought with WBIDC when they had indicated to exit in 2006 AGM saying that while Infy, Wipro are being invited to invest to Kolkata. I saw in some forum mention of RSSOFT with corp governance issues but I haven’t found anything on that front. On sidelines of Nasscom & tie events also I’ve heard that the the chairman is quiet respected in the IT community in Kolkata.

The mgmt looked positive and from whatever I’ve heard from folks their hiring is on in US - most of it seems to be for Visa only.In India it is subdued.

Mahesh, didn’t get a chance to ask this as saw your question late. But whatever I’ve heard from my sources this is still predominantly Visa. And there has not been any significant salary raise.

The stock seems to have flown today. BSE volumes were ~10 cr which is almost 10% of the co. and NSE volumes of Rs. 22 cr. with delivery of only 17% which is around 20% of mkt cap. If anyone with technical analysis knowledge can help with what this indicates?

srisaurabh2000 · July 13, 2012, 3:25pm