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R SYSTEMS INTERNATIONAL LTD (RS)
PRICE: RS.110 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.125 CY12 PE - 5.8X
R Systems' 3QCY11 results were almost in line with estimates. A one-time
sale of hardware of about Rs.90mn, led to a 15% rise in revenues QoQ.
Volume growth was at 3.5%, we understand. Excluding the hardware
component, margins were higher due to better leverage on costs. The
company won 10 new accounts during the quarter. The macro scene has
turned challenging though R Systems has not felt any impact of the same,
as yet. R Systems has a predominantly project - based business, which is
relatively more vulnerable to macro shocks. However, volumes have grown
for five successive quarters now and margins have also improved for the
second successive quarter (excluding rupee impact). We maintain that, only
higher consistency in revenue will lead to better margins and attract higher
valuations for the stock. We upgrade the stock to ACCUMULATE. The price
target stands marginally revised to Rs.124 (Rs.119) based on CY12E earnings.
Earnings per share stand at Rs.19 for CY12. The high amount of (net) cash in
the balance - sheet of about Rs.74 per share by CY12E end may act as
cushion. Recessionary conditions in developed economies and a sharperthan-
expected appreciation in rupee v/s major currencies can pose risks to
our estimates.
Organic volumes grew by 3.5% QoQ
n Revenues grew by about 15.5% on a sequential basis. Of this, about 9%
(Rs.90mn) was contributed by a one-time hardware sale to one of the clients of
Computaris, as a part of the project. Moreover, about 1.8% growth came due to
the currency depreciation.
n Volumes grew by about 4%, we understand. Average realisations were higher
by about 0.65bps and lower license revenues impacted overall revenues by
about 0.18%.
n License revenues were down from Rs.6.5mn in 2Q to Rs.4.7mn.
n This the fifth consecutive quarter of volume growth after 6 consecutive quarters
of de-growth.
n The company added 10 new accounts during the quarter and the company has a
strong pipe line according to the management. The company has 16 $1mn accounts.
n Revenues from existing accounts scaled up during the quarter. One of the large
accounts gave 30% more business to the company during the quarter.
n Moreover, in 1QCY11, the company had already concluded two deals yielding
USD 3-5mn each over a two-three year period in the telecommunication industry.
These projects are scaling up.
n The management has indicated that, clients continue to focus more on cutting
costs and reducing flab.
n Average realizations were marginally higher during the quarter largely due to
mix changes and some improvement from existing clients. However, with the
evolving macro scenario, we believe that, like-to-like increases may be difficult
to come by.
Employee count higher
n The employee strength increased during the quarter by 128 to 2,413. The number
of employees has been fluctuating over quarters and the strength has not yet
come up to the CY09 levels.
n However, the company has added people in 4 out of the previous 5 quarters.
n The blended utilization level including trainees increased to 69.4% from 66.7%
QoQ.
Margins improved
n EBIDTA margins improved by about 140bps QoQ to 9.9%. The hardware component
of the order impacted margins by about 90bps, we understand.
n Margins improved due to the currency impact, higher utilization levels and better
leverage on costs.
n Tax rate rose to about 33% as the tax exemption cover is no more available.
Going forward, we expect tax rate to be about 30% of PBT.
Acquisition of Computaris - integration done; benefits flowing
n The acquisition of Computaris was completed in 1Q and the company is already
reaping the gains of the integration. During the quarter, it has won a large endto-
end deal from Poland through Computaris.
n R Systems had acquired Computaris in an all-cash transaction valued at about
GBP 9mn. Of these about GBP4.25mn has been paid upfront and the balance
will be paid as earn-outs over a two year period.
n Computaris provided solutions and services to telecom industry and specializes in
real-time ratings and billing solutions. It had operations spread across five countries
and had about 240 employees.
n Computaris had revenues of about GBP9mn in CY10 with PAT of about GBP 1 -
1.1mn.
n The company has started reaping the benefits of the acquisition with two deals
already signed.
Future prospects
n We have incorporated the 3QCY11 results and have made changes to our CY11
estimates. We also introduce CY12 estimates.
n We expect revenues to rise by about 40% in CY11 partly on the back of consolidation
of Computaris, one time hardware sales and currency depreciation.
n Margins are expected to improve over CY10 as currency appreciation and higher
utilization more than off-set the salary increases.
n For CY12, we expect revenues to grow by 14% on the back of higher volumes.
n We have assumed the rupee to appreciate to an average of about Rs.46 / USD
v/s Rs. 48 / USD in 4QCY11.
n Margins are expected to improve once again despite salary hikes and expected
currency appreciation on the back of utilization and efficiency benefits.
n After assuming tax at 30% of PBT, we arrive at a PAT of Rs.233mn in CY12,
leading to an EPS of Rs.19.
Valuations and recommendation
n The stock is currently quoting at low valuations, because of the erratic revenue
growth in the past and the low margins.
n We have been maintaining a cautious stance on the stock. The stock has
underperformed the sector post our previous REDUCE recommendation.
n The company has reported margin improvement for two quarters and also volume
growth. Account wins of the past two quarters have started contributing to
revenue growth and Computaris has also been integrated. We have assumed tax
rate at 30% of PBT in CY12E.
n However, the macro scene may once again lead to volatility in revenue growth.
Thus, we upgrade the stock to ACCUMULATE.
n We will become more positive on the stock post seeing increased hiring and further
consistent revenue growth on a sequential basis along with improved margins.
n The high amount of (net) cash in the balance - sheet of about Rs.74 per share by
CY12E end may act as cushion.
Concerns
n Rupee appreciation beyond our assumed levels could provide a downward bias
to our earnings estimates.
n Recessionary conditions in developed economies could impact revenue growth of
Indian vendors, including R Systems.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
R SYSTEMS INTERNATIONAL LTD (RS)
PRICE: RS.110 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.125 CY12 PE - 5.8X
R Systems' 3QCY11 results were almost in line with estimates. A one-time
sale of hardware of about Rs.90mn, led to a 15% rise in revenues QoQ.
Volume growth was at 3.5%, we understand. Excluding the hardware
component, margins were higher due to better leverage on costs. The
company won 10 new accounts during the quarter. The macro scene has
turned challenging though R Systems has not felt any impact of the same,
as yet. R Systems has a predominantly project - based business, which is
relatively more vulnerable to macro shocks. However, volumes have grown
for five successive quarters now and margins have also improved for the
second successive quarter (excluding rupee impact). We maintain that, only
higher consistency in revenue will lead to better margins and attract higher
valuations for the stock. We upgrade the stock to ACCUMULATE. The price
target stands marginally revised to Rs.124 (Rs.119) based on CY12E earnings.
Earnings per share stand at Rs.19 for CY12. The high amount of (net) cash in
the balance - sheet of about Rs.74 per share by CY12E end may act as
cushion. Recessionary conditions in developed economies and a sharperthan-
expected appreciation in rupee v/s major currencies can pose risks to
our estimates.
Organic volumes grew by 3.5% QoQ
n Revenues grew by about 15.5% on a sequential basis. Of this, about 9%
(Rs.90mn) was contributed by a one-time hardware sale to one of the clients of
Computaris, as a part of the project. Moreover, about 1.8% growth came due to
the currency depreciation.
n Volumes grew by about 4%, we understand. Average realisations were higher
by about 0.65bps and lower license revenues impacted overall revenues by
about 0.18%.
n License revenues were down from Rs.6.5mn in 2Q to Rs.4.7mn.
n This the fifth consecutive quarter of volume growth after 6 consecutive quarters
of de-growth.
n The company added 10 new accounts during the quarter and the company has a
strong pipe line according to the management. The company has 16 $1mn accounts.
n Revenues from existing accounts scaled up during the quarter. One of the large
accounts gave 30% more business to the company during the quarter.
n Moreover, in 1QCY11, the company had already concluded two deals yielding
USD 3-5mn each over a two-three year period in the telecommunication industry.
These projects are scaling up.
n The management has indicated that, clients continue to focus more on cutting
costs and reducing flab.
n Average realizations were marginally higher during the quarter largely due to
mix changes and some improvement from existing clients. However, with the
evolving macro scenario, we believe that, like-to-like increases may be difficult
to come by.
Employee count higher
n The employee strength increased during the quarter by 128 to 2,413. The number
of employees has been fluctuating over quarters and the strength has not yet
come up to the CY09 levels.
n However, the company has added people in 4 out of the previous 5 quarters.
n The blended utilization level including trainees increased to 69.4% from 66.7%
QoQ.
Margins improved
n EBIDTA margins improved by about 140bps QoQ to 9.9%. The hardware component
of the order impacted margins by about 90bps, we understand.
n Margins improved due to the currency impact, higher utilization levels and better
leverage on costs.
n Tax rate rose to about 33% as the tax exemption cover is no more available.
Going forward, we expect tax rate to be about 30% of PBT.
Acquisition of Computaris - integration done; benefits flowing
n The acquisition of Computaris was completed in 1Q and the company is already
reaping the gains of the integration. During the quarter, it has won a large endto-
end deal from Poland through Computaris.
n R Systems had acquired Computaris in an all-cash transaction valued at about
GBP 9mn. Of these about GBP4.25mn has been paid upfront and the balance
will be paid as earn-outs over a two year period.
n Computaris provided solutions and services to telecom industry and specializes in
real-time ratings and billing solutions. It had operations spread across five countries
and had about 240 employees.
n Computaris had revenues of about GBP9mn in CY10 with PAT of about GBP 1 -
1.1mn.
n The company has started reaping the benefits of the acquisition with two deals
already signed.
Future prospects
n We have incorporated the 3QCY11 results and have made changes to our CY11
estimates. We also introduce CY12 estimates.
n We expect revenues to rise by about 40% in CY11 partly on the back of consolidation
of Computaris, one time hardware sales and currency depreciation.
n Margins are expected to improve over CY10 as currency appreciation and higher
utilization more than off-set the salary increases.
n For CY12, we expect revenues to grow by 14% on the back of higher volumes.
n We have assumed the rupee to appreciate to an average of about Rs.46 / USD
v/s Rs. 48 / USD in 4QCY11.
n Margins are expected to improve once again despite salary hikes and expected
currency appreciation on the back of utilization and efficiency benefits.
n After assuming tax at 30% of PBT, we arrive at a PAT of Rs.233mn in CY12,
leading to an EPS of Rs.19.
Valuations and recommendation
n The stock is currently quoting at low valuations, because of the erratic revenue
growth in the past and the low margins.
n We have been maintaining a cautious stance on the stock. The stock has
underperformed the sector post our previous REDUCE recommendation.
n The company has reported margin improvement for two quarters and also volume
growth. Account wins of the past two quarters have started contributing to
revenue growth and Computaris has also been integrated. We have assumed tax
rate at 30% of PBT in CY12E.
n However, the macro scene may once again lead to volatility in revenue growth.
Thus, we upgrade the stock to ACCUMULATE.
n We will become more positive on the stock post seeing increased hiring and further
consistent revenue growth on a sequential basis along with improved margins.
n The high amount of (net) cash in the balance - sheet of about Rs.74 per share by
CY12E end may act as cushion.
Concerns
n Rupee appreciation beyond our assumed levels could provide a downward bias
to our earnings estimates.
n Recessionary conditions in developed economies could impact revenue growth of
Indian vendors, including R Systems.
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