The Hindu Business Line : R Systems International: Invest at cut-off

Investors with a penchant for risk may consider an exposure in the book-built initial public offering of R Systems International. As a product development firm focussed on the burgeoning arena of outsourced product development, it offers another option for investors to diversify their IT portfolio.

The other positives are clients spread across different verticals, with lower percentage of revenues from the top five clients vis-à-vis its peers.

However, the risks associated with the offer are fairly high. As the revenue growth of R Systems is linked to the success of products developed by the end-user product firms, there is a higher risk of volatility in the financial performance.

More so, as outsourced product development has picked up momentum over the past year and competition has intensified. In this backdrop, investors need to moderate their return expectations in the short run.

The price band for this offer has been fixed at Rs 210-250 per share. Bidding at the cut-off price (at the upper end of Rs 250) will be a better option. However, from a return perspective, our comfort level will be higher if the pricing is at the lower end of the band.

The price earnings multiple works out to 18-21 times the consolidated 2005 earnings. Though the demand is encouraging, the offer is aggressively priced at the upper end of the price band compared to recent high profile software IPOs and some listed stocks in this line.

Product development

As Fortune 1000 companies have begun to share the IP (intellectual property) for their products for development, several companies, including R Systems, Aztec Software, Persistent Systems, Ness Technologies, Aspire and Symphony Services, have capitalised on this opportunity.

Through a couple of key acquisitions of Indus and ECnet, R Systems has managed to widen its vertical expertise to banking and finance, and manufacturing and logistics. Its current range of offerings cover industry verticals such as high technology, public sector, apart from banking and manufacturing.

This diversification across verticals places them at an advantage vis-à-vis its peers. Both the choice of verticals as well as product development initiatives pursued by the company will hold the key to its future growth.

Fluctuating performance

On a consolidated basis, R Systems has clocked revenues of Rs 157 crore and post-tax earnings of Rs 12.5 crore for the year ended December 31, 2005. The company had incurred a net loss in December 2003, but has recovered smartly since then.

The operating margin at 12 per cent and the net margin at 8 per cent are lower than some of its peers, though differences exist in operating segments.

There is, however, substantial headroom for growth in operating margins as business volumes pick up across the board.

The competition will remain intense, as some established players exist across all verticals.

Offer details

R Systems is making a fresh issue and offer for sale (primarily by GE and Intel Capital) of 44.08 lakh shares. The book running lead manager is IL&FS Investsmart. The offer opens on March 28 and closes on 31.

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