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!