‘Stable’ RS Software Recent Numbers ‘Not Impressive’

IT sector in India is evergreen and full of players in different sizes. The share price of the RS Software India (RS Software) came in focus sometime back when Reserve Bank of India (RBI) launched Unified Payment Interface (UPI) application. The company developed UPI software which could help it to expand its market reach UPI these days being the buzz. Meanwhile, we tried to analyse RS Software stock for our reader-investors.

India is the world's largest sourcing destination for the information technology (IT) sector, accounting for around 67 per cent of the USD 124 to 130 billion (Rs 8224 to 8622 billion) market. The IT sector is expected to grow 11 per cent per annum and triple its current annual revenue to reach USD 350 billion by FY 2025, according to the National Association of Software and Services Companies (NASSCOM).

India’s internet economy is expected to touch Rs 10 trillion by 2018, accounting for 5 per cent of the country’s gross domestic product (GDP), according to the Boston Consulting Group (BCG) and Internet & Mobile Association of India (IAMAI). India’s internet user base reached over 350 million by June 2015, the third largest in the world, while the number of social media users raised to 143 million by April 2015 and smartphone users grew to 160 million.

RS Software is a software driven payment services provider. The company is focused on providing software solutions to electronic payment industries. It is engaged in development, testing and maintenance of software. RS Software offers application lifecycle management across various platforms, including cloud-based, e-commerce and m-commerce, using an array of tools and methodologies. The company provides automated offerings, including integration, system, regression, performance, smoke, stress, security and certification testing. RS Software offers an application lifecycle management services that maintain and support existing applications and new functionalities. The company delivers application and platform migration, reverse engineering, performance tuning and around the clock production. It serves the needs of the various organizations in the payments industry. It operates in the United States, the United Kingdom and India.

According to an NPCI, the number of non-cash transactions per person stands at just 6 per year. There is just 6 per cent of retailers in India have card payment acceptance infrastructure. Further as soon as smart phone penetration increases over the next few years, there will be opportunities for payment through mobile network.

UPI is a unified architecture to facilitate next generation online immediate payments, Indian language interfaces, and universal access to internet and data. The new software service is expected to further push easy instant payments through mobile, web, and other applications. The payments can be both sender (payer) and receiver (payee) initiated and will be carried out in a secure, convenient, and integrated fashion. It supports the growth of e-commerce, while simultaneously meeting the target of financial inclusion.

The Reserve Bank of India (RBI) launched UPI on April 11. The launch of UPI in India is being considered as a great opportunity for the company that will revolutionise India’s payment systems. The UPI will make money transfers simple. The platform is inter-operable across different banks and will allow instant payments. The company will continue to build various applications for the money transfer software. It is going to add several more features for the software and work is in that direction in progress. RS Software will add features such as for disputes, chargebacks or reverse transactions. RS Software built UPI software which has been focusing on electronic payment from last two decades. On financial front, RS Software already accumulated Rs 4 crore till date.
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When RS Software started working with a major payment network, that software was good for about 500 transactions per second. Now, it has tested for 56000 transactions per second. The company is overseeing a similar revolution happening with the UPI, for India in a much shorter span of time. RS Software’s focus in India is very specialised and strategic. During FY16, it has plans to launch its own digital payment platform. RS Software has competitive advantage over industry.

During month of February, RS Software has acquired four new customers in USA and India. The company also bagged additional projects from National Payments Corporation (NCPI) valued at Rs 36 crore. The NCPI’s order will be executed within three to five years.

RS Software and Base Commerce have signed a multi-year contract to build the next generation payment enablement platform. Both of the companies will have huge opportunity in the growth of digital commerce. The company’s partnership with Base Commerce will lead to provide proprietary global execution methodology, the industry’s best practices, proven tools and established frameworks.

RS Software and Base Commerce teams will be leveraging cutting edge technology stacks to enhance core systems and creating new products & services around digital payments. These products will feature open API architectures and software development kits (SDKs). Further, there will be active development methodology to provide the foundation for reinforcing Base Commerce’s competitive advantage.

Financially, RS Software was facing positive tailwinds till last year, it’s revenue was declining by compounded annual growth rate (CAGR) of 6.37 per cent over the period of five years as of FY16. During the same period company’s EBITDA (earnings before interest, depreciation and amortisation) CAGR decreased by 46.08 per cent. CAGR of employee expenses also reduced by 4.63 per cent in last 5 years. CAGR of net profit too declined by 22.73 per cent in the last five years.

On a consolidated basis, the company’s total revenue from operations for FY16 decreased by 49.52 per cent to Rs 190 crore from Rs 377 in the previous fiscal. The EBITDA also declined by 96.49 per cent to Rs 3.28 crore from Rs 93 crore on yearly basis. The EBITDA margin stood at 1.73 per cent for FY16 compared to 24.8 per cent same period last year. The substantial reduction in EBITDA is on back of the substantial cut off in employee compensation expenses by company which decreased by 38.8 per cent YoY in FY16 and reached to Rs 148 crores compared to Rs 242 crores in FY15. The employee expenses consist of 78.01 per cent of total revenue in FY16 which was 64.33 per cent in FY15. The net profit of the company contracted by 87.76 per cent to Rs 7.95 crores compared to Rs 65 crores in FY15. The net profit margin stood at 4.18 per cent in FY16 compared to 17.25 per cent in FY15.

On geographic segmental revenue front, for FY16, RS Software earned 82.71 per cent from the United States of America (USA) market and remaining 17.29 per cent from the rest of the world (RoW). The revenue of company from the USA declined significantly by 56.54 per cent to from Rs 362 crores in FY15 to Rs 157 crores in FY16 on yearly basis. Meanwhile, RS Software’s RoW segment also increased by two folds to Rs 32.86 crores in FY16.

On quarterly basis the consolidated net revenue from operations stood at Rs 25 crores in Q4FY16 compared to Rs 22.68 crores in Q3FY16 with increment of 10.23 per cent as quarter on quarter (QoQ). The sales of the company could not even breakeven the expenses and EBITDA stood at Rs 9.65 crores loss with consecutive operational loss. It’s EBITDA loss for Q3FY16 stood at Rs 11.15 crores. RS Software reported net loss of Rs 3.23 crores net profit stood at Rs 12.85 crores in Q3FY16.

On valuation front, RS Software’s share price is trading at trailing twelve month (TTM) price to earnings per share (PE) multiple of 6.19x times as compared to industry PE multiple of 18.55x times. The company’s EPS stood at Rs 18.32. Meanwhile, its dividend yield stands at 2.86 per cent.

RS Software’s financial performance for FY16 has been degrading in nature. The company’s new project and client additions can improve financials in FY17. There are certain events which triggered the stock such as addition of new business clients, launch of UPI software which will ensure payment banking with an ease. Therefore, we are giving stable scenario for RS Software in near term.