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Polaris Software Lab: Limited Upside

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DQI Bureau
New Update

With the new government at the Center, the over all mood of the stock markets

has undergone a change. The great hopes pinned on PSU disinvestments have been

thwarted while investors are searching for safe havens to park their funds.

Among the sectors in limelight in the current market situation is the software

sector.

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The software sector which, thanks to earlier Congress government, is almost

entirely out of bureaucratic control and is further unaffected by domestic

economic swings and bottlenecks. With these attributes, it makes the sector an

interesting defensive player in a market riddled with political uncertainty.

Going forward expect the software stocks to remain bullish, not only because of

the upcoming recovery in US, but also because of the troubles of the UPA

government.

Among the second rung software companies, Chennai-based Polaris is among the

largest and secured with significant business from Citibank, which is also its

largest institutional investor. The company's performance in the recent past

has not been too exciting and lot depends on the current year ramp up under way.

F

A C T S H E E T
Website:

www.polaris.co.in



Polaris House, 244, Anna Salai,


Chennai - 600 006 Tamil Nadu


Tel: +91-44-28524154


Fax: +91-44-28523280


Area

of Specialization
Software

development, turnkey project management, systems integration and

consulting
Revenues

(March 2004) Rs 646 crore
Offices

India, Australia, Germany, Hong Kong, Ireland, Japan, Saudi Arabia,

Dubai, Switzerland, UK and USA
Listing

(Stock Exchanges): BSE, NSE and Kolkata
Face

Value
Rs 5 per share
Current

Market Price
Rs 130 per share
52

Week High/Low
277/ 95
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Incorporated in 1993, Polaris Software is a provider of technology solutions

and IT services mainly in the BFSI domain, offering products and solutions in

areas of consulting, project management, systems integration and customized

software development for corporate banking, retail banking, trade finance,

credit, cash, risk and treasury management, lending, investments and securities

mutual funds, credit cards and insurance.

Headquartered in Chennai, the company has 22 offices around the globe along

with six software engineering centers back home and a Business Continuity Center

in Singapore. The key clients of Polaris are ABN AMRO Bank, Hewlett Packard,

Allianz, Reuters, NEC, Saudi American Bank, and UBS. The company has a strong

18-year old relationship with Citibank developing, deploying and supporting

Citibank customers across the world.

The company reported healthy results for the financial year ended March 2004.

Revenues amounted to Rs 646.4 crore, registering a growth of 51% as compared to

Rs 428.3 crore earned in the previous fiscal. Revenues earned from business

activities abroad were Rs 578.5 crore, contributing 90% of the total revenues

earned during the year. Domestic revenues amounted to Rs 68.0 crore contributing

the balance 10% of the total revenues. Polaris earned 85% of its annual revenues

by way of services rendered amounting to Rs 548.8 crore as against Rs 97.6 crore

earned from sale of products contributing 15%. Citigroup contribution to the

revenues grew 35% amounting to Rs 379 crores as against Rs 280 crore y-o-y,

contributing 59% of the total revenues. The net profit for the fiscal 2004

amounted to Rs 72.2 crore, up 5% as compared to Rs 68.8 crore earned for the

financial year ended March 2003. The marginal increase in the net profit as

compared to the rise in revenues is due to the 96% y-o-y increase in the selling

and marketing expenses due to incurrence of brand creation costs for 'intellect'

and expenses incurred for expansion of the sales and the accounts management

team.

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In July 2003, Polaris Software successfully deployed NEC's Global Banking

System product at the Yachiyo Bank in Japan. The former would continue to play a

major role in the customization wherever NEC has similar projects in the nature

of deployment of the banking product. The company also signed up as alliance

consulting partner with PeopleSoft to provide implementation and related

services on PeopleSoft products, thereby aiming to strengthen its position as an

end-to-end enterprise solutions provider.

Financial

Performance

2003 2004 2005* 2006*
Sales 428 646 788 967
Other

Income
3 -6 2 3
Operating

Profit
102 128 168 220
Operating

Profit Margin (%)
24 20 21 23
Net

Profit
69 72 92 104
Equity

Capital**
49 49 49 49
EPS

(Rs)
7 5 10 11
*Projected

Face value

per share is Rs 5

Year

ended March 31
Note:

All figures in Rs crore unless indicated otherwise
All

figures are rounded-off

For the last quarter of the fiscal ended March 2004, the company declared

disappointing results, wherein the revenues amounted to Rs 170.3 crore, up 3%

q-o-q and 9% y-o-y as compared to Rs 165.0 crore and Rs 155.9 crore

respectively. As far as the geographical revenue breakup is concerned, America

was the key player contributing 42% of the total revenues amounting to Rs 71.4

crore followed by Asia Pacific and Japan contributing 24% amounting to Rs 40.4

crore, Europe contributing 23% tallying to 38.5 crore and the balance 11%

contributed by India amounting to Rs 20.1 crore. As regards the region wise

revenue growth India led the way with a 17% increase in growth, as compared to

an increase of 5% and 2% in revenues from America and the Asia Pacific region

respectively. Europe witnessed a 3% decline in revenue growth. The net profit

for the same period amounted to Rs 10.5 crore, down 55% and 47% as compared to

Rs 23.3 crore sequentially and Rs 20.0 crore year-on-year. This drastic decline

is attributable to foreign exchange losses on account of rupee appreciation

especially towards the end of the fiscal 2004.

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Polaris recently launched 'Intellect Suite', an enterprise platform for

financial services institutions, which is the new version of Polaris' OrbiOne

suite of banking products that was the proprietary product of OrbiTech

Solutions, which merged with Polaris in October 2002. The company claims that

the Intellect Suite would meet the needs of global retail, wholesale, investment

and private banks, catering to the front, middle and back office functions of

the banks besides providing business intelligence to manage the various lines of

business.

The company entered into a partnership with Germany-based IT consultant,

Plenum AG to jointly offer high-value and risk mitigated Offshore Management

Solutions to customers in Germany, Austria and Switzerland. In addition, the

partnership would offer services ranging from IT management consulting, offshore

software development and delivery, IT process consulting and technology

management training, enabling the former to leverage its strengths further in

the competitive European markets.

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Polaris Software's employee strength at the end of March 2004 stood at

4976, was higher by an addition of 269 over the previous quarter and by 728 over

the strength as compared to the December 2003 and as on March 2003. There were

respectively. 4528 software professionals employed as against 448 employed as

support staff.

Going ahead, the company expects to earn revenues in the region of Rs 776

crore to Rs 808 crore for the fiscal 2005, a growth of 20% to 25%. The net

profit is estimated to increase by 25% to 30% amounting to Rs 90 crore to Rs 94

crore. Polaris software is looking to develop a combination of services and

products revenue model with an aim to accelerate profitability and growth in the

services business and is banking on 'intellect' to position itself in the

products space.

The share of the company is currently traded at Rs 130 discounting our

estimated March 2005 and March 2006 EPS by 14 and 12 times respectively. While

the software sector is getting increased interest from investors due to its

insularity to the domestic economy, investors are unlikely to see significant

appreciation in the Polaris stock in the near to mid term.

Sushanto Mitra The

author is the founder of Technology Capital Partners



The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here

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