RS Software, a small cap company with a market cap of only Rs. 493 crore, has been on fire in the last few months. In the last one month itself, the stock has given a mind-blowing return of 67%. The 3 month return is 90% while the 1 year return is a fabulous 173%.
I know, without even looking, that Dolly Khanna’s magic wand is at work. Dolly has been quietly accumulating the stock. As of June 2014, she held a massive chunk of 486,962 shares, worth Rs. 18.74 crore.
What is noteworthy at this stage is that Sunil Singhania, the whiz-kid who manages billions of rupees for Reliance Mutual Fund, has also decided that RS Software is worthy of more allocation. He has gone ahead and bought a chunk of 70,000 shares at Rs. 325 each in July 2014. This takes the cumulative holding of Reliance Equity Fund & Reliance Wealth Management in RS Software to 401,850 shares.
Now, the all-important question is: what is it about RS Software that has caught the attention of savvy investors like Dolly Khanna and Sunil Singhania and is there any more juice left in the stock for us.
Sunidhi starts the report by emphasizing that RS Software has “Solid growth prospects”. It points out that RS Software is a “vertically integrated technology solution provider to the electronic payments industry”. It has been in business for the last two decades and operates in four continents. It provides solutions to Payment Networks, Processors, Acquirers, Issuers, ISOs and other major players in the electronic payments domain. RS Software boasts of marquee clients like Visa, Visa EU, Visa CEMEA, Maclane, Pemco and Vignon.
RS Software appears to be on a high growth trajectory if you go by their FY 2014 results. During FY 2014, the consolidated net profit rose 44.6% to Rs. 51.2 crore while the sales rose 20% to Rs. 381.9 crore. The OPM and NPM stood at 22.0% and 12.2% vs. 18% and 11.2% respectively in 9MFY13.
This upward trajectory has continued in Q1FY15. The net profit increased 54.9% to Rs. 15.8 crore while the revenue increased 9.7% to Rs. 98.6 crore. The OPM and NPM stood at 25.8% and 16.5% vs. 20.4% and 12.3% respectively in Q1FY14.
Sunidhi also points out that RS Software is a zero debt company. While the value of the gross block is Rs. 90 crore, the cash & cash equivalents as at 31 March 2014 is Rs. 102 core or Rs. 80/share.
As regards valuations, at the CMP of Rs. 384, RS Software is trading at a P/E of 7.5x based on the FY15E EPS of Rs. 51. While this is not cheap for a small cap company, it is quite reasonable given the size of the opportunity available to RS Software, says Sunidhi. Sunidhi has foreseen a target price of Rs. 500 for the stock, which means an upside of about 30% from the CMP.
FirstCall Research is also gung-ho about RS Software. It foresees that the net Sales and PAT of RS Software will grow at a CAGR of 16% and 28% over 2013 to 2016E respectively and that the Earning per share (EPS) for FY15E and FY16E will be Rs.51.10 and Rs.59.37 respectively translating into a P/E ratio is at 7.51 x FY15E and 6.46 x FY16E respectively, at the current market price of Rs. 383.70.
FirstCall expects that the growth scenario is likely to continue for the next three years and has advocated a Buy with a target price of Rs.430.
Having read the research reports, it does look like RS Software is a stock that one can bank on for out-sized gains. Of course, we ought to have climbed onto the bandwagon much earlier, knowing that the stock was a favourite of Dolly Khanna. Anyway, better late than never!