The Hindu Business Line : R. S. Software: Invest

Shareholders of R. S. Software (India) with a high-risk appetite can consider investing in the rights offer being made at Rs 65 per share. The positives linked to this offer are the company's niche focus on software solutions for the electronic payments space and a turnaround in its financial performance over the past one-and-a-half years.

However, the company's indifferent past financial record, including net losses between 2002 and 2005, recent default in repayment of loans to banks/ financial institutions, and high client concentration represent downside risks to the stock.

`Payment' service provider

Out of the rights offer proceeds of Rs 16.75 crore, Rs 2 crore is to be used to repay high-cost borrowings from ICICI Bank and Rs 7 crore each for upgradation of infrastructure and working capital requirements.

Over the last two years, R. S. Software has transitioned from being a generic software services provider to a niche player in the payment systems domain.

Since the global banking industry has huge potential for growth in technology spending, the company is focussing its energies on becoming a full `payment' service provider for its clients, which encompass software services, products, processing payments and consulting.

In the payment solutions market, it is targeting segments such as acquirers (including processing houses, Internet payment gateways, point of sale terminal manufacturers), associations (such as credit card, debit/ATM networks, electronic check clearing) and merchants, among others. It is developing a string of solution offerings that cater to these services.

The turnaround

For four years since the IT meltdown and September 11 terrorist strikes in 2001, the company has been incurring net losses on its operations. It engineered a turnaround only in 2005-06 and strengthened its performance in the first half of 2006-07.

For the half year ended September 30, 2006, it recorded revenues of Rs 52.78 crore and post-tax earnings of Rs 4.42 crore. The operating profit margin works out to 18.3 per cent, marginally higher than the 17.8 per cent in the corresponding previous period.

The price-earnings multiple works out to six times its annualised FY-07 per share earnings on a fully diluted equity base, which leaves room for capital appreciation.

Offer details

About 24.59 lakh shares are on offer in the ratio of one share for every two held. The offer will mop up Rs 15.98 crore. The current equity base, which stands at Rs 4.9 crore, will increase to Rs 7.37 crore, post-rights offer.

The promoter's current equity stake of 25.3 per cent (post-rights) is likely to rise to 32 per cent subject to conversion of detachable warrants attached to the non-convertible debentures in the third quarter of 2007.

Ashika Capital is the lead manager to the offer. The listing will be on the NSE, the BSE, Ahmedabad, Calcutta and Delhi Stock Exchanges. The offer opened on October 24 and closes on November 23.

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