Home RS Software – Stock Analysis

RS Software – Stock Analysis

Price – Rs. 83.20

View – Neutral

RS Software (or the “Company”) is a digital payments solutions provider servicing clients in India, U.S. and the UK. The company engages in the development, testing, and maintenance of software products. Its solutions cover digital payments, data analytics, merchant acquiring, security and compliance, QA and testing, and payment processing. It serves financial institutions, banks, payment networks, payment processors, and merchants. The company is headquartered in Kolkata, India.

(in Rs. lakhs)          
Particulars 2016-2017 2015-2016 2014-2015 2013-2014 2012-2013
Total Income from Operations  7,613  19,000  37,642  38,188  31,818
Expenses  11,552  19,089  28,863  31,087  27,195
Earnings Before Other Income, Interest, Tax and Depreciation (EBITDA)  -3,939  -89  8,780  7,101  4,623
Depreciation  398  417  555  548  347
Finance Costs  10  22  38  88  94
Other income  1,351  1,550  1,165  733  435
PBT  -2,588  1,439  9,907  7,746  4,964
Tax  -766  378  3,168  2,388  1,171
PAT (before Minority Interest and share of Associates)  -1,822  1,061  6,739  5,358  3,793
Profit/ (loss) attributable to Minority Interest  –  –  –  –  –
Share of profit / (loss) of Associates  –  266  245  240  249
Consolidated Profit / (Loss) for the year  -1,822  795  6,494  5,118  3,544

Cancellation of Restrictive Visa Deal

The Company helped build the electronic payment infrastructure of the world’s largest payment network – VISA, enhancing its capacity from authorizing 500 transactions per second in 1992 to 56,000 transactions per second as of today.

After working for over a decade with Visa, the Company has scaled back its operations substantially with VISA to explore other emerging opportunities particularly in India. There were many restrictive covenants in its service agreement deal with Visa which prevented RS Software to explore opportunities outside tis relation with VISA (Note: VISA accounted for over 90% of revenue for RS Software). This has resulted in lower revenues for FY 2017 and the consequent loss for the same financial year. Going forward however, this will give the Company immense opportunities to pursue the ever evolving online payments and products market in India and elsewhere. Over the next 3-4 years, the current 257 billion electronic payment transactions could potentially grow to 1 trillion transactions per year (Source: Company Annual Report).

Further, the fact that RS Software cancelled this restrictive deal with VISA goes to show the confidence which the Company poses in its ability to pursue higher growth elsewhere.

Strong balance sheet | Zero Debt and Surplus Cash to Support Inorganic Expansion

The Company has a very strong balance sheet and good return ratios. The Company operates with zero debt and has reserves and surplus on its books amounting to Rs.196.90 Cr. as of 31st March 2017. On the back of strong balance sheet position, RS Software is in a better position to invest in attractive opportunities like buyout to support inorganic expansion in the coming years.

Growing Market Opportunity – Growth in Platforms, Products and New Markets

Of the U.S. $30 trillion annual global spend at merchants, 33% is through a payment card. The number is increasing rapidly, driven by central banks calling for financial inclusion and faster payments. Around 100 countries are engaged in building and enhancing their payment infrastructure, creating a wider market for payment focused companies like RS Software.

RS Software is engaged in the maintenance of payment networks globally and provides technology solutions to users of electronic payments industry. The Company is engaged in providing a comprehensive range of services developed and customized to facilitate efficient financial intermediation.

The Company is fast making efforts to move away from a pure service model for revenue toward providing various products and platforms to merchants particularly in India to enable them to conduct everything from client KYC to last mile collection of payments. Digitization boom in India has opened up this geography for the Company which promises very good growth opportunities. The Company has been working with various large clients in developing applications across various platforms along with maintenance and testing within the identified verticals. In FY 2017, the Company added 20 new clients to its portfolio. RS Software continues to receive repeat & new orders from their existing client base.

Focus on Emerging Countries like India

RS Software has been a global IT services company deriving over 98%% of its revenue from outside India. However, the changing Indian payments landscape has opened up large opportunities for the Company.

In FY 2016, the Company executed digital payment infrastructure building for India (Unified Payment Interface – UPI). The Company is in the process of creating a standardized set of APIs (Application program interface), which will allow payments across networks using authentication methods like passwords, PINs, tests, among others.

rs software

Mobile Payment Industry – Fast Evolving Segment

The growth in smartphones is the biggest driver for electronic payments industry.  Smartphones have become the preferred medium for money transactions because of the convenience they provides on the go. The mobile wallet market in India is expected to reach U.S. $ 6.6 billion by FY 2020 as per the ‘India Mobile Wallet Market Forecast and Opportunities, 2020’.

Mobile payments are fast evolving and are expected to change the way consumers and businesses operate. As technology and telecom companies are rolling out mobile payment applications and services, mobile strategies are beginning to transform existing business models in a number of sectors such as banking and retail.

In FY 2016, more than 40 % of e-commerce transactions in India took place via mobile phones and more than 52 % transactions through other digital payments. Initially, starting with phone recharges, mobile wallets then extended their services to DTH recharges and bill payments. Today, the growing mobile wallet segment has e-commerce, couponing/cashback and lots more.

As RS Software is a niche player in the electronics payments industry, any development in this area will be beneficial for the Company.


Client Concentration Risk

Majority of RS Software’s revenue (more than 80% in FY 2017) is generated through sales made to one client – Visa Inc, the largest electronic payment service provider of the world. 

Weak Financial Performance in FY 2017

The Company’s total operating income witnessed a significant decline of about 56% y-o-y in FY 2017 to Rs. 89.64 Cr. due to decline in orders flow and execution of the same led by discontinuance of its ties with Visa Inc. The Company incurred a net loss of Rs. 18.22 in FY 2017.

Competition Risk

RS Software also faces competition from other major IT services providers who have presence across geographies, huge client base and huge amount of cash and resources at their disposal.