Today, when you see RS Software languishing at Rs. 70, it is hard to imagine that the stock was once the darling of super-savvy investors like Dolly Khanna, Vineeta Mahnot, Vijay Aggarwal, Reliance Capital, Barclays, Orange Mauritius and others. Just 16 months ago (Sept 2014), the stock was towering over its peers at Rs. 415. There were excitable reports on how the stock had turned into a “5-Bagger” and how Vijay Aggarwal had stormed the counter in a desperate bid to buy a massive truckload of the stock with no questions asked as to valuations.
Since the peak, the stock has lost 83% of its value. On a YoY basis, the stock is down 72%.
Ironically, the “deep moat” for which the stock was so coveted by the savvy investors, namely, the contract with Visa, the multi-billion dollar credit card powerhouse company, became the reason for the downfall.
The logic behind RS Software’s attractiveness was easy to understand. Global corporates like Visa don’t appoint local vendors except after total due diligence into all aspects of management capability, financial standing, ability to deliver, scalability etc. Also, once such companies trust a vendor, they are reluctant to make a change owing to the disruption it entails. So, once a company lands itself a contract, the revenues are expected to flow into the coffers incessantly. Also, as credit card usage, which is presently at low levels in the Country, increases, RS Software’s revenues were expected to rise proportionately, with no corresponding increase in costs. Also, the fact that the company was trusted by a marquee client like Visa meant that other clients would beat a path to its door.
RS Software was also a textbook example of a great stock. It boasted of high RoE, debt-free status and a charismatic CEO-promoter in Raj Jain. It also had an impressive trajectory of growth and profitability.
Dolly Khanna led the charge of the savvy brigade. She stormed into the counter in December 2012 by buying a chunk of 191,723 shares (1.67%) and aggressively increased her holding to a peak of 486,962 shares (3.80%) as of June 2014. Dolly’s holding as of September 2015 is 771,708 shares (after split) (3.00%).
As it always happens, Dolly’s vote of confidence to RS Software attracted a number of other savvy investors and hordes of novice investors who dived into the stock without a second’s thought.
What spoilt the party was Visa’s ambition to go it alone. It established an inhouse R&D Center in Bengalure that will hire 1,000 persons over the next three years. It also awarded a $200 million, 5-year contract to Infosys for “application development, testing and infrastructure management services”.
This sounded the death knell for RS Software. Visa’s dependence on RS is dimisinhing day by day, resulting in reduced turnover and profitability for the latter. It is only a matter of time before Visa pulls the plug on RS Software, if it has not already done so.
So, the so-called “deep moat” for which RS Software was so coveted became a “deep trap”, trapping investors with no escape route.
Now, the question is as to what we can learn from the fiasco. The answer is that there is not much to learn from a fundamental perspective. RS Software had high RoE and is debt-free. The only known risk was the fact that it was highly dependent on Visa. However, this was discounted by the fact that if Visa trusted RS Software, other big-ticket vendors would also do so, sooner or later. Also, the entire e-commerce and electronics payments scenario was burgeoning and RS Software was believed to be ideally positioned to grab a share of the pie.
The only tangible lesson to take home from the RS Software and Kitex Garments’ debacles is that one should never over-expose oneself to any one stock no matter how compelling the story sounds and how confident one feels about the stock.
Having a properly diversified portfolio is the only way to survive such meltdowns.
Of course, it is no surprise that Dolly Khanna, Vijay Kedia, Ashish Kacholia, Ramesh Damani and the other savvy investors have already realized this fact and have a widely diversified portfolio. We should follow in their illustrious footsteps if we have not already done so!
all big names mislead
Well there is another aspect I guess and that is Management Quality issue which at least I feel as a novice investor I have missed in both the Stocks.
1. For Kitex no proper explanation has been given on their sales over expected growth projection and funny logic behind their foreign cash holding while paying the interest on their Debt.
2. For RS Software they haven’t disclosed that their only customer has a contract till 2012 and as a result the revenue based on which the assumption has made has dropped sharply. Because the Moat Dolly Khanna has mentioned earlier is actually not at all their.
This is a great example i believe. Here again comes the known fact of buying stocks with enough margin of safety. I too bought into RS Software. However as my buy price was low 120 Rs. ( Split adjusted) i could leave with a heavy heart with 50%. The stock kept on falling from its peak of 415.
Now the interesting question to ponder is…with such great cash balance n trained professionals RS is sure to wade off this and see growth path in near future…
So, how low is a value buy? A good stock…in the worst days…great recipe for multibagger return. What say folks? Click on my image to see many such opportunities.
Good one. I am invested in the stock, unfortunately! Holding 550 @ 120/share. I bought into the stock with complete knowledge of the Co losing Visa, its biggest client, but my take was that at 120 this was priced in and the downward risk was minimal. I am proven wrong, or at least it looks that way for now! In my view losing visa does not mean that RS Software is a finished story. It will scale back but it could a year or two from now. Till then I’ll play the waiting game!
with just 20% correction, all Gurus and their theories getting exposed 🙂
Has Dolly made a grand escape in RSSoftware just like she did with Hawkins Cookers ?
Add Cera too to the escape list.
I think she still holds it. But she bought the shares at a very low price and even today she must be at a profit on those shares. Additionally, she must have made good money selling 0.8% of the Co. shares she previously held. So lets not worry about her.
Well it seems Dolly has made good her escape as seen from the latest shareholding pattern… I guess that’s why the stock had such a brutal fall as she was selling off at 100 to 70..
http://www.moneycontrol.com/bse/shareholding/stocks_hold.php?type=1&res=search&id=4844
Dolly Khanna always buy small cap stocks but also see that atleast it is of average quality if not more.But risk in following her is only one.She get at at very cheap and when you know it is always late.From there on chances of her exit are bright and you may not get desired return.You can learn from her but very difficult to follow as she get it too early and silently..So before following her, ensure what is her buying price.
To perform like this is nature of this stock.I am tracking it for aprox16 years ,when ever market start moving up,it will start moving up after one quarter of start of Bull Run and will be first to start melting before market goes down.I think some great play by some one every time.So in next bull run ride early and exit early.There are many stocks like this .To me these are flavour of the season.All these explanations are for public consumption.
RS Software with only one major client VISA intn’l how can it perform in this wide software area. It is like a tailor made company serving only visa
What we can learn —
-very difficult to bet on software players since its a dynamic space and not much effort in starting a new company
-be wary of companies which have a major client accounting for much revenue. They can squeeze profits, move on etc
-RS was earlier always “undervalued” in the markets. So market participants were always not so enthusiastic..
there is a reason why buffett never invested in tech stocks..
Not only Dolly Khanna failed in RS Software, but she failed in case of Venus Remedies . Today the loss is roughly 50% than her acquisition price.
I think people should stop paying any attention to these investors.
I doubt Even Porinju Valliath will also fall like this someday.
these people never asked to buy these stocks?
Vindicates my belief that fundamental analysis is very subjective. Technical analysts would have got out of the stock at around 200 levels !
big people only make big mistakes
Big people can afford to do big mistakes..here they are gambling not investing.
Can we identify other hot stocks with single client risk? I come to think of Redington!
Another lesson to take is to control ones greed. Once the stock becomes 2x must cash out and not wait for the stock to crash.
exiting at 2X is very bad idea.. rather use trailing stop loss
I too bought this stock but exited with 10% profit when I realised that income was not growing at all in last 8 quarters. Most of the profit growth was from their cash reserves investment.
Much of the bull run in this stock was an account of ‘rupaya’ card which might overcome visa and master as many thought and it might grab this big contract given its association with visa. Things did not work on RSS favor and future looks uncertain and bleak. These days it is tough for small IT firms to overcome the marketing big spend by biggies and mid tier.
Not follow the big names, normally buy a stock at very lower level & by the time the news reaches the world, it’s already have gone 2x-3x & the big name is ready to move & poor retail investor gets trapped.
The first characteristic of a multibagger stocks are
1> First its totally unheard stock & rarely any one has a courage to buy @ lower value.
2> Financial figures may not be good enough to a qualify as a buy
3> But fundamentally or structurally futuristic changes which will give very good returns might be happening.
4> Turnaround stories due to change in business cycle
Astute investors pick this points to early & buy big at lower levels .
Retail investors start buying when the story is ripe enough & the price rise slows down.
For multibaggers please have a look @ Mukta Arts & Bajaj Hindustan
Please have a relook at Mukta Arts. It’s still a very early catch !!
RS Software Corporate Communication Response
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The “deep moat” of the company was never the contract with Visa and the significant growth the company has achieved with this client. The MOAT for RS Software is the knowledge built over 20 years in building electronic payments infrastructure – software applications that execute an electronic payment transaction at high speed and high volume within the regulatory framework.
The retail electronic payments industry is now nearing $2 trillion in revenue, and growing. Never before has the cultural shift and technology innovation come together , resulting in major disruption and evolution of digital payments. The incumbents are spending to protect their leadership, the Disruptors are spending to benefit from the opportunity. RS Software wins no matter who spends and this is where the future of our company is and we are well prepared with an enviable foundation.
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our leadership in being a niche company that has its MOAT in its exclusive focus in the domain area of electronic payments industry.
Since 2004, we have doubled our revenues almost every 5 years and this trend is expected to continue. The good news is we have already acquired 10 new clients since we started to transition our strategy, and this validates the approach we have adopted.
Our decisions have consistently reflected our ability to execute well the strategy that we pursue. We have invested and will continue to invest aggressively to expand our customer base, now that we are free from single client dominance.
We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. RS Software has a track record of making bold decisions: In 1991 RS Software was the first company to bring IBM 390 technology to India, which has been the lead technology to build India’s foundation in IT services leadership globally; In 2004 RS Software was the first company to take a decision to focus exclusively in one domain, electronic payments. Domain focus is now the key to future growth.
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Market leadership will translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
The ‘deep moat’ for RS Software lies in its domain knowledge of payments. At a macro level RS Software strategy is to offer capabilities both in infrastructure building and digital payments. The company over the last 20 years has built a unique distinction of being a leadership company in combining IT outsourcing and exclusive focus on retail electronic payments. The macro strategy will translate in four specific areas of A: Digital payments; B: Testing; C: Analytics; D: Building of core payment infrastructure to facilitate authorization, clearing and settlement of electronic payment transactions, along with risk management, security and dispute management.
Thanks for the clarification!~
Investors have been awaiting a communique from the co after the meltdown in the results.
1) Why has the company not been able to execute the M&A despite a year having gone by and Mr Jains assurances..?
2) Does the company forsee losses for the next few quarters?
Thanks!~ 😉
you talk about creating shareholder value over a long term. i think 18 years can be defined as a long term. can you please tell how much was your market capitalization in the year 1998 and how much is it in 2016? instead of giving corporate jargons why dont you put the numbers?
I think a fair reply by R S Software. Probably the first time, a listed company has cared to respond to some of the barbs or rumors going on in the market. The only thing we have to see is that do we believe upon this reply statement from R S Software or it is a simple manipulative, tempting, great and hollow statement by a Company.
To Freeman Rodrigues:
You have to tell a convincing story behind Mukta Arts and Bajaj Hindustan for other investors to bring credibility to the issue.
Below is the fundamental Analysis for Mukta Arts.
It is one of the worst performing stock till date.
IPO Price of Rs 155 in 2001/2, now at Rs 57.
You won’t get the true picture if you review the financial figures for last 3-4 years.
Current Market Cap – Rs 123
Mukta Cinemas:
Mukta Cinema are presently having 36 Screens & about 20-25 are scheduled to open in next 2-3 months.
It will reach around 100 Screens by Dec 16.
PVR & INOX are valued more then Rs 6 Cr/Screen.
But Mukta is having screens in tier 2-3 cities.
So mukta Cinemas can easily valued around Rs 150 Cr & can command a valuation of Rs 250 Cr by end of 2016.
Even though the ATP is low but it is having a good occupancy level.
WWI :- it’s education arm is rank in top 10 Film & Media schools in the world.
Currently they have around 550 students & run various media courses from Acting, Film Making, Fashion Designing to Music
They also conduct various other short terms courses.
Various leading companies have got their excellence center on the campus like Sony, Foxxconn, carl zeiss & many more
WWI Goregoan campus was in litigation, seems like it will resolved in the company favour.
YoutubeSpace Mumbai
Google partners with WWI for it’s Youtube Space at WWW campus. It’s 8th such center across the world.
Foxconn partners with WWI & starts media center at WWW campus. It also has announce a business partnership with Mukta Arts for Digital Media.
It’s yet to announce the exact details of the partnership. Foxconn partnership was announce in presence of the CM of Maharashtra clearly signifies the WWI Land issue is resolved favorably
WWI institute should be easily valued around Rs 300 Cr. it’s construction cost around 10 years ago was Rs 125 Cr.
ConnectOne – It’s a new company started for digital media . It’s going to be the surprise package. it’s has started releasing short films on youtube.
It’s going to be very important USP with the entry of Netflix & Youtube Red.
Real Estate : Has redeveloped it’s studio & leased on rent. It’s has around 55,000 Sq/ft @ Andheri
Also it has got Mukta house at Filmcity which is partially rented out to companies like Reliance Media & Maya Digital Studios
It also has around 20,000 of Real Estate @ Bandra
Mukta Arts Production : The core production is having a library of 40 Films which generate around Rs 35-40 Cr/ per 5 years as satellite rights.
As per my knowledge, this should be valued around Rs 100 Cr.
After a break of 3-4 years, Mukta arts is getting aggressive in the production space. 3 Movies are to be announced & going under production.
Mukta Distributors : Its has a subsidiary Mukta VN Films which is into movies distribution
Maya Digital Studios : it has a stake in maya digital studios which produces TV serial Motu Aur Patlu
Management has taken lot of efforts to expand the base of company from a film production company to a truly Media conglomerate.
This company has performed badly in last few years. so it’s available at such a pathetic valuations
There is a very little downward risk & But the Upward gains can be tremendous. May be 10-15 times in next 12 months
Shareholding pattern (As per Dec – 15)
Promoters : 71%
Top 5 investors : 11%
HNI’s( Only 22) : 11-13 % (Holding More than 1 lakh)
Around 96 % holding is with 30-35 peoples & rest 3-4 % is with 5000 small shareholders.
So operator can drive the prices easily.
It is the most ignored stock till now.
** Confidential Source : 2 of the big bulls have taken position in mukta arts in last quarter.
** Execution of management is very sloppy
RS Software,
I am impressed that the company spokesperson took the pains and the time to respond. First time, I have seen an Indian company trying to clear qualms.
I own a hedge fund and would like to visit the company Development Center and Corporate Office. My request is to put me in touch with the right individuals from the company…. I can travel to India this month-end and visit the company officials if you can help me.
In fact, RS Software should open a separate communication channel with its esteemed and aggrieved investors as in the above comments-link and should see that whatever has been reported by their corporate communication should be executed in a time bound manner with monthly kind of progress report given/sent to a select set of investors.
This will go a long way in bringing back their lost credibility and confidence among investing community.