CMP 53.70

Target Price 67.00

ISIN: INE411H01032

JULY 30th

2014

R SYSTEMS INTERNATIONAL LTD

Result Update(PARENT BASIS): Q2 CY14

BUYBUYBUYBUY

Index Details

Stock Data

Sector IT

BSE Code 532735

Face Value 1.00

52wk. High / Low (Rs.) 68.30/20.00

Volume (2wk. Avg.) 17000

Market Cap (Rs. in mn.) 6761.90

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS CY13A CY14E CY15E

Net Sales 2701.22 3133.42 3634.76

EBITDA 592.10 732.87 683.95

Net Profit 365.52 440.32 411.26

EPS 2.90 3.50 3.27

P/E 18.50 15.36 16.44

Shareholding Pattern (%)

1 Year Comparative Graph

R SYSTEMS INTERNATIONAL LTD BSE SENSEX

SYNOPSIS

R Systems International Ltd founded in 1993, is one of the leading provider of outsourced product development and customer support services.

Net profit grew by 75.53% at Rs. 85.57 million in

current June quarter compared to Rs. 48.75 million

in the corresponding quarter of the previous year.

Revenue for the quarter rose by 10.41% to Rs. 718.25 million from Rs. 650.53 million, when compared with the prior year period.

Profit before interest, depreciation and tax is Rs. 148.18 millions as against Rs. 94.54 millions, registered a growth of 56.74%.

Consolidated revenue from operations for Q2 CY14 was Rs. 1606.7 million compared to Rs. 1452.2million in Q2 CY13, an increase of 10.64%.

Total Consolidated Cash and bank balance as at June 30, 2014 was Rs. 995.1 mn compared to Rs. 1239.0 mn as on March 31, 2014.

One of the leading providers of cloud-based products for health insurers and state health agencies based in USA has engaged R Systems for various cloud based J2EE initiatives using spring and Hibernate technologies.

The Company has incorporated a wholly owned subsidiary R Systems Products & Technologies Ltd and has approved the transfer of Indus IT Product and Service business operated out of Pune and Chennai locations to this subsidiary company.

Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 26% over 2012 to 2015E respectively.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

R Systems International Ltd. 53.70 6761.90 2.90 18.50 3.60 145.00

Accelya Kale Solutions Ltd. 711.80 10624.5 59.39 11.99 13.93 0.00

Sasken Communication Technologies Ltd. 310.00 6632.3 23.59 13.21 1.55 45.00

Financial Technologies Ltd. 329.50 15199.0 0.00 0.00 0.62 100.00

QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q2 CY14,

R Systems is an integrated Product Lifecycle

Management (iPLM) company offering valued

outsourcing services to Fortune 1000, Government

and Mid-sized organizations, reported its financial

results for the quarter ended 30th Jun, 2014.

Months Jun-14 Jun-13 % Change

Net Sales 718.25 650.53 10.41

PAT 85.57 48.75 75.53

EPS 0.68 3.88 (82.59)

EBITDA 148.18 94.54 56.74

The company’s net profit jumps to Rs. 85.57 million against Rs. 48.75 million in the corresponding quarter

ending of previous year, an increase of 75.53%. Revenue for the quarter rose by 10.41% to Rs. 718.25 million

from Rs. 650.53 million, when compared with the prior year period. The company has reported an EPS of Rs. 0.68

for the 2nd quarter as against an EPS of Rs. 3.88 in the corresponding quarter of the previous year. Profit before

interest, depreciation and tax is Rs. 148.18 millions as against Rs. 94.54 millions in the corresponding period of

the previous year.

Break up of Expenditure

Break up of Expenditure

Rs. Millions

Q2 CY14 Q2 CY13

Travelling & Conveyance

Expenses 56.26 51.38

Depreciation & Amortisation

expenses 16.91 12.12

Employees Benefit Expenses 442.32 409.41

Legal & Professional

Expenses 12.75 9.44

Other Expenditure 52.19 79.38

Communication Costs 14.5 12.64

Segment Revenue

Latest Updates

• The Company has incorporated a wholly owned subsidiary R Systems Products & Technologies Ltd and has

approved the transfer of Indus IT Product and Service business operated out of Pune and Chennai locations

to this subsidiary company.

• One of the leading providers of cloud-based products for health insurers and state health agencies based in

USA has engaged R Systems for various cloud based J2EE initiatives using spring and Hibernate technologies.

• One of the leading Accounting and Consulting firm in USA has selected R Systems for IT services covering a

suite of Microsoft applications along with handling significant database migration.

• The Company has issued 712,600 equity shares of Rs. 1 each at an exercise price of Rs.12.07 per share,

pursuant to exercise of employee stock options.

Highlights (Consolidated)

• Consolidated revenue from operations for Q2 CY14 was Rs. 1606.7 million compared to Rs. 1452.2million in

Q2 CY13, an increase of 10.64%.

• Profit before interest, depreciation and tax is Rs. 224.3 millions as against Rs. 156.5 millions, registered a

growth of 43.27% YoY.

• During the quarter, Net profit after taxes was Rs. 139.3 million compared to Rs. 76.8 million, grew by 81.38%

YoY.

COMPANY PROFILE

R Systems was incorporated in 1993 as a consulting firm in the United States. With a focus on delivering quality

to all customers, the company started its India operations in 1997, opened headquarters in Noida, and started

offshore software development services.

The Company had received strategic investments by Intel Capital and GE Capital in 2001 and 2002, and with a

backdrop of success response obtained from ISVs, R Systems had undergone a massive transformation by the

year 2006. From offshore software Development Company to global outsourced product Development Company,

R Systems sharpened its business focus. Remarkable acquisitions including Pune based Indus Software, and

Singapore based ECnet, were carried out.

R Systems rapidly growing customer list includes a variety of Fortune 1000, government and mid-sized

organizations across a wide range of industry verticals including Banking and Finance, High Technology,

Independent Software Vendors, Telecom and Digital Media, Government, HealthCare, Manufacturing and Logistic

Industries. To further strengthen the Telecom Vertical, R Systems acquired UK based Computaris. The company

also continued its focus on quality and got the certification, SEI CMMi Level 5 v 1.2. R Systems maintains thirteen

development and service centres and serve customers in the US, Europe, South America, the Far East, the Middle

East and Africa.

Business Area

• Telecom & Media

• Banking & Financials

• Healthcare

• Manufacturing & Logistics

Services

• OPD-iPLM

• Application Services

• Testing Services

• BPO & KPO Services

• Packaged Services

Geographical Presence:

• India

o Noida

o Pune

o Chennai

• Singapore

• United States of America

o El Dorado Hills

o Salt Lake City

o Atlanta

• Europe

o Enschede, Netherlands

o Metz, France

o Bucharest, Romania

o Warsaw, Poland

o London, United Kingdom

o Moldova

FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as at December 31, 2012-2015E

CY12A CY13A CY14E CY15E

EQUITY AND LIABILITIES

Shareholder's Funds

Share Capital 124.47 125.92 125.92 125.92

Reserves and Surplus 1677.92 1754.62 1877.44 2065.19

1) Sub Total - Net worth 1802.39 1880.54 2003.36 2191.11

Non Current Liabilities

Long-term borrowings 3.45 4.40 4.93 5.22

Other Long Term Liabilities 6.57 3.83 4.44 4.80

Long Term Provisions 71.24 73.44 84.46 92.06

2) Sub Total - Non Current Liabilities 81.26 81.67 93.83 102.08

Current Liabilities

Trade Payables 118.80 152.85 146.74 151.14

Other Current Liabilities 130.17 113.27 265.50 300.02

Short Term Provisions 266.68 322.89 203.42 183.08

3) Sub Total - Current Liabilities 515.65 589.01 615.66 634.23

TOTAL EQUITY AND LIABILITIES (1+2+3) 2399.30 2551.22 2712.85 2927.42

ASSETS

Fixed Assets:

i. Tangible Assets 278.22 308.53 333.21 353.21

ii. Intangible Assets 14.09 23.40 28.55 33.69

iii. Intangible assets under development 12.32 14.13 16.11 17.88

a) Sub Total - Fixed Assets 304.63 346.06 377.87 404.77

b) Non Current Investments 767.02 793.61 833.29 866.62

c) Deferred Tax Assets 48.79 51.38 46.76 49.09

d) Long Term Loans and Advances 89.48 68.61 59.00 63.72

e) other non-current assets 71.33 79.71 75.72 80.27

1) Sub Total - Non Current Assets 1281.25 1339.37 1392.64 1464.48

Current Assets

Current Investments 0.00 10.00 19.50 23.01

Trade receivables 462.87 579.53 685.84 781.69

Cash and Bank Balances 548.16 441.55 423.89 440.84

Short-terms loans & advances 43.45 67.86 91.61 108.10

Other Current Assets 63.57 112.91 99.36 109.30

2) Sub Total - Current Assets 1118.05 1211.85 1320.20 1462.94

TOTAL ASSETS (1+2) 2399.30 2551.22 2712.85 2927.42

Annual Profit & Loss Statement for the period of 2012 to 2015E

Value(Rs.in.mn) CY12A CY13A CY14E CY15E

Description 12m 12m 12m 12m

Net Sales 2291.36 2701.22 3133.42 3634.76

Other Income 40.13 38.51 43.52 47.87

Total Income 2331.49 2739.73 3176.93 3682.63

Expenditure -1959.09 -2147.63 -2444.06 -2998.68

Operating Profit 372.40 592.10 732.87 683.95

Interest -2.73 -2.80 -2.91 -3.20

Gross profit 369.67 589.30 729.96 680.75

Depreciation -62.40 -47.81 -59.76 -66.93

Profit Before Tax 307.27 541.49 670.19 613.81

Tax -101.98 -175.97 -229.88 -202.56

Net Profit 205.29 365.52 440.32 411.26

Equity capital 124.47 125.92 125.92 125.92

Reserves 1677.92 1754.62 1877.44 2065.19

Face value 10.00 1.00 1.00 1.00

EPS 16.49 2.90 3.50 3.27

Quarterly Profit & Loss Statement for the period of 31st Dec, 2013 to 30th Sep, 2014E

Value(Rs.in.mn) 31-Dec-13 31-Mar-14 30-Jun-14 30-Sep-14E

Description 3m 3m 3m 3m

Net sales 737.72 704.26 718.25 811.62

Other income 9.57 10.95 10.15 10.56

Total Income 747.29 715.21 728.40 822.18

Expenditure -510.60 -558.01 -580.22 -620.08

Operating profit 236.69 157.20 148.18 202.10

Interest -0.87 -0.85 -0.67 -0.70

Gross profit 235.82 156.35 147.51 201.40

Depreciation -12.46 -15.54 -16.91 -16.57

Profit Before Tax 223.36 140.81 130.60 184.82

Tax -77.03 -48.36 -45.03 -62.99

Net Profit 146.33 92.45 85.57 121.84

Equity capital 125.92 126.63 126.63 126.63

Face value 1.00 1.00 1.00 1.00

EPS 1.16 0.73 0.68 0.96

Ratio Analysis

Particulars CY12A CY13A CY14E CY15E

EPS (Rs.) 16.49 2.90 3.50 3.27

EBITDA Margin (%) 16.25 21.92 23.39 18.82

PBT Margin (%) 13.41 20.05 21.39 16.89

PAT Margin (%) 8.96 13.53 14.05 11.31

P/E Ratio (x) 3.26 18.50 15.36 16.44

ROE (%) 11.39 19.44 21.98 18.77

ROCE (%) 24.08 33.95 39.47 34.19

EV/EBITDA (x) 0.33 10.67 8.63 9.22

Book Value (Rs.) 144.81 14.93 15.91 17.40

P/BV 0.37 3.60 3.38 3.09

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs.53.70, the stock P/E ratio is at 15.36 x CY14E and 16.44 x CY15E

respectively.

� Earning per share (EPS) of the company for the earnings for CY14E and CY15E is seen at Rs.3.50 and Rs.3.27

respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 26% over 2012 to 2015E

respectively.

� On the basis of EV/EBITDA, the stock trades at 8.63 x for CY14E and 9.22 x for CY15E.

� Price to Book Value of the stock is expected to be at 3.38 x and 3.09 x respectively for CY14E and CY15E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs. 67.00 for Medium to Long term

investment.

INDUSTRY OVERVIEW

Information Technology (IT) has made possible information access at gigabit speeds. It has created a level

playing field among nations and created has a positive impact on the lives of millions.

Today, a country’s IT potential is paramount for its march towards global competitiveness, healthy gross

domestic product (GDP) and meeting up the energy and environmental challenges.

The Indian IT and Information Technology enabled Services (ITeS) sectors go hand-in-hand in every aspect. The

industry has not only transformed India’s image on the global platform, but also fuelled economic growth by

energising the higher education sector (especially in engineering and computer science). The industry has

employed almost 10 million Indians and, hence, has contributed significantly to social transformation in the

country.

India is one of the fastest-growing IT services markets in the world. It is also the world’s largest sourcing

destination, accounting for approximately 52 per cent of the US$ 124–130 billion market. The country’s cost

competitiveness in providing IT services continues to be its USP in the global sourcing market.

The Department of Electronics and Information Technology is coordinating strategic activities, promoting skill

development programmes, enhancing infrastructure capabilities and supporting research and development

(R&D) for India’s leadership position in IT and ITeS.

Market Size

Indian IT and ITeS industry is divided into four major segments – IT services, business process management

(BPM), software products and engineering services, and hardware. The IT services sector accounted for the

largest share of the IT and ITeS industry, with a total market size of US$ 56.3 billion during FY13, followed by

BPM sector (US$ 20.9 billion), and software products and engineering services (US$ 17.9 billion); the market size

for hardware was US$ 13.3 billion during FY12.

The Indian IT-BPM industry is expected to add revenues of US$ 13–14 billion to the existing revenues by FY15,

according to National Association of Software and Services Companies (NASSCOM).

The industry grew at a compound annual growth rate (CAGR) of 13.1 per cent during FY08–13.Total exports

from the IT-BPM sector (excluding hardware) were estimated at US$ 76 billion during FY13, Export of IT services

has been the major contributor, accounting for 57.9 per cent of total IT exports (excluding hardware) in FY13.

BPM accounted for 23.5 per cent of total IT exports during the same fiscal. The IT outsourcing sector is expected

to see exports growing by 13–15 per cent during FY15.

Investments

Indian IT's core competencies and strengths have placed it on the international canvas, attracting investments

from major countries.

According to the Department of Industrial Policy and Promotion (DIPP), the computer software and hardware

sector attracted foreign direct investment (FDI) worth Rs 59,381.64 crore (US$ 9.89 billion) between April 2000

and February 2014.

Some of the major investments in Indian IT and ITeS sector are as follows:

• Tata Consultancy Services (TCS) plans to merge its two units in Japan with Mitsubishi Corp’s IT

subsidiary to create a joint venture (JV) company with a revenue base of US$ 600 million in the world’s

second-largest market for software services.

• Private equity (PE) firm TPG Growth and India's Smile Group will jointly invest US$ 100 million to help

internet and e-commerce companies build and scale their businesses across the Asia–Pacific region and

West Asia.

• Synechron plans to invest US$ 30–35 million on the expansion of its Hyderabad and Bengaluru facilities.

• Bharti Airtel, India's largest telecom operator, has renewed its technology outsourcing contract with

software major IBM for a period of five years.

• Infosys has partnered with telecom company Orange to provide Internet TV to its customers. Infosys will

deliver a portfolio of interactive TV apps on the Orange Livebox Play. The TV apps will be powered by

Infosys DigitizeEdge, a digital asset and experience platform for TV operators, media companies,

advertisers and content publishers.

Government Initiatives

The Government of India played a key role with public funding of a large, well trained pool of engineers and

management personnel who could forge the Indian IT industry.

The Central Government and the respective State Governments are expected to collectively spend US$ 6.4 billion

on IT products and services in 2014, an increase of 4.3 per cent over 2013, according to a study by Gartner.

Some of the major initiatives taken by the Government to promote IT and ITeS sector in India are as follows:

• The Government of Bihar has unveiled 20 km free Wi-Fi zone in Patna, the longest across the planet,

making a strong impression on the world's infotech map.

• The Government of India has given an in-principle approval for setting up of the first electronic system

design and manufacturing (ESDM) cluster development in Electronics City, Bengaluru. The ESDM project

will come up on a 1.16 acre of land at an investment of approximately Rs 85 crore (US$ 14.16 million).

• More than 20 small and medium enterprises (SMEs) in the IT sector have recently received land

allotment letters from the Government of Punjab to set up their units with an investment of Rs 500 crore

(US$ 83.24 million).

• The Governments of Maharashtra and Tamil Nadu are in talks with NASSCOM to set up ‘start-up

warehouses’ for incubation of start-ups. The centres are expected to come up in Mumbai and Chennai and

are likely to be operational by December 2014.

Road Ahead

India’s IT sector is gradually moving from linear models (rising headcount to increase revenue) to non-linear

ones.

In line with this, IT companies in the country are focusing on new models such as platform-based BPM services

and creation of intellectual property.

Tier II and III cities are increasingly gaining traction among IT companies aiming to establish business in India.

Cheap labour, affordable real estate, favourable government regulations, tax breaks and special economic zone

(SEZ) schemes are facilitating their emergence as new IT destinations.

Indian insurance companies also plan to spend Rs 12,100 crore (US$ 2.01 billion) on IT products and services in

2014, a 12 per cent rise over 2013. This forecast includes spending by insurers on internal IT (including

personnel), software, hardware, external IT services and telecommunications.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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