I currently am tracking midcap & small cap IT stocks. With the rupee depreciation, high cash levels in the books, and some of them differentiating themselves by focusing on a niche, they seem to be good area to look for returns.
I am currently tracking Sasken, Polaris & Thinksoft in this space.
One stock that I have recently bought is Thinksoft. The stock has recently moved up 30%, but still on a consolidated basis it has a dividend yield of 8%.
The positives as per me
Niche of Third Party Software Testing in the BFSI Space
Cash of Rs 40 per share and CMP is Rs 64
Dividend of Rs 5 (2 Interim & 3 Final)
The promoter is on record that they will beat the industry dollar growth rate. So I anticipate Dollar Growth of 15-20%
The margins were low, as the utilisation levels were pretty low. Now the company is gaining traction especially in US and Far East
The promoters have fairly good reputation
The one big Negative is that
The IPO came in Sep 2009 and there is this talk in the market that an operator took over the scrip and made it rise as high as Rs 500. I have spoken to the promoters and their version is that they had nothing to do with it. It could be that the exiting shareholder - EurIndia had a role to play in it. That part is open to debate and further research, but I do feel that this perception issue is reflected in the price
Even I have been evaluating this company for sometime now. However, I was not able to see any niche in the company.
The company has declared a dividend on 3/- . At 64 it works out to ~4.7%.The company is trading at a PE of ~8, which is true for most of the companies in the space with similar size.
There could definitely be a upside if there is increase in the margins / growth of 20-30% in the top line. This is quite easily possible for a company of Thinksoft’s size. However we do not have any update on the same. But we will have to find out more on that.
There is nothing going right for the company. The dividend that they paid… if you check their cash flow… dividend amount is close to full year cash flow from operations,… also cash on books is going to be utlised for the acquistion. Also management are looking to sell off the business in 2 years time frame after reaching a 500cr sales.
Sorry for the delayed response. Got stuck in some last minute catchups so could not respond earlier.
The Q1 Nos are out. On the face of it, they look great but I suspect a large part of the margin expansion is because of the Rupee depreciation.
So my take is given the rupee tailwinds and the fact that their utilisation is going up. Getting an EPS of Rs 18-20 would befeasiblein this year. And if the dividend is maintained on a Rs 5 dividend, the yield would also be interesting.
We have also asked the management to get into regular quarterly calls and they had one with a limited audience. Hopefully from next time onwards can schedule a regular concall for all to participate.
Genglemen, would like you guys to take a look at RS Software. I am invested and could be biased. However it still looks good , I bought it at avg of 65. Still looks like a value buy considering their expertise and size and the investment they have made in emerging technologies in their domain. If the rupee continues to be above 50 their margins will be very good.
I believe Thinksoft is relatively better than RS Software for many reasons.
1). RS Software is mostly dependant on VISA
2). RS Software less dividend yield compared to Thinksoft
3). Promoters picked up more stake in RSSoftware through preferrential offer.
I am not saying RS Software is a bad pick but my point here is Thinksoft will command more multiples going forward. Remember CSC picked up Applabs for 2.5 X Sales i.e around Rs 1250 crore. Thinksoft is the largest independant testing services provider in India. Giving 1.5 times sales itself will get this company around Rs 200 crore which translates to Rs 200 in stock price. Remember Thinksoft is a cash rich company though some of its cash (Rs 9 crore) is being utilized to buy new premises…Overall company is looking great for a target of Rs 150 in one years time.
I mentioned elsewhere in the forum that testing is a low end stuff in IT and that would be an overhang with Thinksoft. RS Soft should typically have better margins than them.
RS Soft and Thinksoft have run up quiet a bit so it will be interesting on who grows more in future and how much the future is discounted. I think if RS Soft maintains the June rate which typically has been their weakest quarter traditionally then they can easily do an EPS of 40 for FY13.
One question is that if Thinksoft has cash then why are they taking 15 cr. loan for a new facility when the interest rates are high? RS Soft has it’s 7 floor own premises which is not valued apart from the cash/MFs they hold.
Both will beat 12% growth that NASSCOM is targetting. Both are cheap as well. But I think RS Software can surprise because it is a turnaround case and they have done some hiring last year and they themselves are aware that a high percentage of work from Visa is a big risk. Also the return raios and 3 yr CAGR numbers are better for RSSOFT. In the recent past the promoters have been increasing stake thru open market though the preferential allotment was not in good light. But from what I understand since the promoter stake was low and at 60 bucks it was a lame duck for a takeover.
However, there are other overhangs with RS Soft, I read in a blog elsewhere that they did not believe the RS Soft results were genuine - though I don’t believe that as exact explanation was not there. And there are folks who do not rate this folks high on corp governance though I do not know the reason - I’ve checked with old investors and NASSCOM and Tie folks and they always have had high regard for the company. And obviously the high dependance on Visa is a big negative.
At CMP I think Infinite Sol and Nucleus Soft may be better picks than these two. Infinite is suffering from overhang of bad Q4 FY12 results and a prominent fund exitting in Dec '11. Nucleus is suffering from holding cash and not distributing it or using for growth. And RS Soft is a high risk, high return kind of scenario if it can surprise on certain factors.
A rerating of these cos might not happen because there are others like Zensar,Zylog which also are there. And also the overhang from last decade where the big 4 did 30% CAGR anyways so there was no need to look at midcap or small cap IT players. This perception of the market probably has to change for these folks to be rerated.
Couldnt agree more with what Saurabh has summarized. Comparing RS Software with ThinkSoft is like comparing apple to orange, RS Software’s services are niche, though their margins are low now, they can expand margins. Imagine millions of Indians making payments electronically…electricity bills, water bills, autoinsurance, rent, many more, huge opportunity in Indian subcontinent, RS Software has made investments for future andwill benefit. RS Software has been in electronic payment Industry for long time and has developed technologies. Whatever I have read about its promoters is fairly good. Raj Jain was NASSCOM’s president in early 2000, so you can Imagine. It still looks like value buy because, it’s consolidated P/E is about just 4 !!! RS Software also has cash of about RS 40 cr.
My friend gone are those days where testing is considered as a low end IT stuff…I am in the industry for 15 years and Testing especially automation related work is witnessing a massive boom and billing rates are at par with rest of other services. Margins are increasing too…Look at Thinksoft numbers.
I strongly believe Thinksoft’s current valuations are still cheap and Rs 120-150 levels should justify the growth. Nucleus and Zensar will catch up soon.
Remember Thinksoft is an acquisition target due to the niche it carved in Testing. Companies do take loans despite of having cash on hand coz their cash might be parked in better instruments. That is not a viable question at all. Look at Reliance for example do you think Reliance Ind have not taken any loans despite of huge cash in the bank.
It is time to look beyond IT stocks come September as Market is likely to get re-rated with RBI under pressure to cut rates. But for now second rung IT rules. Good luck with your RS Soft while I sit tight with my Thinksoft.
It all depends on the company’s strategy…The cash might be parked in long term instruments or the company might be getting a loan for cheaper interest rates. Take the case of Reliance Industries too. The best part is dividend with in 6 months time, the company is paying Rs 6 as dividend which is stunning. Also during Q2 company lost Rs 2.9 crore in forex which reduced the overall net profit but still this is the stock to watch out for in the coming months. Accumulate on dips to Rs 90 for a target of Rs 150. New 3 year deal with NPCI is a big plus
Mindtree is coming out with great results consistently. TTM NP is at 329 Cr and market cap of 3200 Cr at current price.
Mindtree had a growth of 73% for the 9 month period EPS. The margins have been expanding and the guidance is also promising with deal pipeline stronger than last year.
At forward P/E below 10 it looks attractive.A good takeover candidate with promoter stake at 18% only.
Mindtree now has a PE of 21.21 and P/S of 3.13. P/BV is around 5. Mindtree has always been growing more than the average published by NASSCOM. It has good quarterly results as well as annual results. If anyone tracking this, would like to know his views.
SQS is trading right now at earning yield of 5% (PE=22) with dividend yield of 5% . I see a very limited downside from here and if growth returns i could give decent return to shareholders.
but the offer price is just around Rs 474 /- , What do you guys think ? Has it run up too much.
Or its still a value buy and the company will raise the offer price.
