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.
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.
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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.
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.
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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.
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.
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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.
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