Price – Rs. 77.60

View – Neutral

RS Software is a digital payments solutions provider. 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.

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 for the last 6 years with 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.

Niche Player in the Electronic Payments Industry

RS Software is engaged in the maintenance of payment networks globally and provides technology solutions to the 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 has been working with various large clients in developing applications across various platforms along with maintenance and testing within the identified verticals. RS Software continues to receive repeat & new orders from their existing client base.

Growing Market Opportunity

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.

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). 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.

Mobile Payment Industry – Fast Evolving Segment

The growth in smartphone is the biggest driver of the electronic payments industry.  Smartphone has become the preferred medium for money transactions because of the convenience it 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.

WHAT’S GOING AGAINST THE STOCK

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 service providers who has a high presence across geographies, huge client base and huge amount of cash and resources at their disposal.