Focused on offshore product development services
Unnatural growth in profit in FY 2005 and unexciting acquisitions are disheartening
Promoted by Satinder Singh Rekhi in 1993, R Systems International is a New Delhi-based software product development company. It helps companies bring products and services to market quickly by using its different products and services comprising the pSuite framework, which is an execution framework for PLM (product lifecycle management) services. Other services include building and supporting software products in diverse areas like Internet security, Internet music delivery, Internet IP TV, banking applications, supply chain management, ERP solutions, and knowledge management. These software products and services find application across industry verticals such as banking and finance, government, health care, high technology and independent software vendors.
R Systems's marquee clientele includes a variety of Fortune 1000, government and mid-sized organizations like GE, Intel, and ABN Amro.
Of its five large centers for software excellence, R Systems has one center in El Dorado Hills, CA, one center in Singapore, and the other three in India (Pune, Chennai and Noida). It also has a significant presence in the ASEAN area with its local headquarters in Singapore and seven regional offices. Singapore is also its Center for Supply Chain Management (SCM) excellence.
Other than the two 100% subsidiaries, R Systems Inc California and R Systems in Singapore, it has acquired two companies, Indus and ECnet, to cater to the banking, finance and manufacturing and logistics verticals. Indus Lending Solutions Business products cater to the retail lending industry and the ECnet suite of products offer supply chain collaboration solutions.
In February 2002, R Systems acquired a 44.75% stake in Indus from GE. In the transaction, GE received 2,983,475 shares of R Systems for giving up its shares in Indus. As of December 2005, GE was entitled to receive 445,000 warrants under the shareholders' agreement. On January 2006, GE assigned its rights to such warrants to GE Strategic Investment India. On 30 January 2006, GE Strategic Investment India exercised the right of converting such warrants into equity shares and 445,000 equity shares of Rs 2 each in the company were subsequently issued to GE Strategic Investment India.
The objects of the issue is to raise finance for up-gradation and expansion of its existing infrastructure at an estimated cost of Rs 31.50 crore coupled with repayment of outstanding loans of Rs 3.65 crore and financing the general working capital requirements of Rs 17.95 crore.
Strengths
- In the last few years, software products companies have seen an exponential growth. The year 2005 saw the rise of offshore product development (OPD) players due to the need for more specialised skills across the product development lifecycle. R System is well positioned to take advantage of these opportunities going forward, with its strong domain expertise in this area.
- R Systems has a marquee clientele in its kitty including big names GE, Intel, ABN Amro, and Microsof. Around 34% of the company's revenue comes from its top 5 clients.
Weaknesses
- R Systems's acquisition of Indus Software and ECnet does not seem to be successful and has led to the diversion of attention from core focus area of OPD to developing and selling products, where it cannot scale up. On a consolidated basis, the company went into the red in FY 2003 because of these acquisitions. Even now, these acquisitions are not contributing any profit.
- On standalone basis, R Systems's sales have grown consistently in the last four years. But the bottom line has been fluctuating between Rs 43 lakh to Rs 2.9 crore. It was only in FY 2005 that the company saw a massive rise in net profit to Rs 12.46 crore.
Valuation:
On an expanded equity of Rs 13.54 crore, FY 2005 EPS of R Systems works out to Rs 9.2. Based on this, PE stands at 23 and 27 at the price band of Rs 210 and Rs 250. Comparable companies like Aztec and Geometric are trading at a TTM PE of 28 and 25 times.
Just ahead of the IPO, R Systems dramatically improved its performance in the year ended December 2005. An overnight wonder, will it still keep shining at noon?