Polaris Software Lab Strong Banking Base

Fact Sheet

Polaris Software Lab
713, Anna Salai
Chennai 600006
Phone: 040-8524154 
Fax: 040-8523280
Web site: www.polaris.co.in 
Offices: Chennai, London, New Jersey, California, Singapore, Sydney, Riyadh and Bahrain.
Listing (Stock Exchanges): Mumbai Stock Exchange, National Stock Exchange and Chennai Stock Exchange
BSE Code: 32254
NSE Code: POLARIS

The infotech boom inspired a host of companies to dream and
be a part of the IT revolution. The natural effect was the flow of such
companies offering shares through IPOs, similar to the one by the financial
services sector about six years ago. However, memories of the financial sector’s
rapid decline still haunt investors. In those days, the stock markets were
flooded with countless IPOs, the majority being dubious. The recent decline of
many software stocks is clearly attributable to the large number of companies
with indifferent quality.

Polaris Software Lab is an exception to this trend. It came
out with a public issue in August 1999 and has invested the funds well. Polaris
operates in the growing banking and financial segment.

Background: Focused

Chennai-based Polaris Software Lab was incorporated in
January 1993 as a private limited company with a team of 50 professionals
focused on development of banking and financial services solutions. Since its
inception, Polaris’ turnover has grown from Rs 1.8 crore in fiscal ended
1994-95 to Rs 146.1 crore in fiscal 1999-00. In the past five years, turnover
grew at a CAGR of 140% whereas net profits rose 107%. Polaris was founded and is
currently headed by Arun Jain, who had earlier co-promoted Nucleus Software.

Polaris’ August 1999 IPO was for 3,512,550 equity shares of
Rs 10 each at a premium of Rs 200 per share, which totaled Rs 73.8 crore. The
IPO received an overwhelming response and was oversubscribed by 20 times.
Polaris recently made a stock split from face value of Rs 10 per share to Rs 5
per share. The company’s current equity stands at Rs 17.1 crore with the
promoters holding 46% of the shares, corporate bodies holding 13%, FIIs and NRIs
holding 7%, banks and mutual funds holding 4% and the balance 29% held by the
public.

Operations: Offshore driven

Polaris is a fast growing software services company and has
created a strong presence in the international market in just six years of
operations. The company’s services include migration, re-engineering, ERP
consulting, technical consultancy, testing and validation, data networking and
Web-enabled application development.

Polaris offers services through its eight strategic business
units, which cater to different segments and technology domains. Polaris earned
of Rs 146.1 crore in fiscal 1999-00, up by 143% over the previous fiscal.
Revenues from Citibank reportedly accounted for more than 25% of the total
revenues. Incidentally, Citicorp Finance (India) holds 11% equity stake in
Polaris.

Polaris’ strength lies in its expertise in the banking and
finance area, which the company now plans to leverage to enter the insurance
area. Among its recent projects, Polaris, along with three other international
companies, is executing a $83 million project for NEC, Japan. The project
includes systems integration, development and implementation. Polaris expects to
earn around $3-5 million in fiscal 2000-01. Polaris has also entered into an
alliance with Marshall & Liisley Corp, USA, to develop a banking product
based on the latter’s EastPoint. The product to be developed by Polaris will
be known as PolarisPoint. Polaris will market the product in the domestic market
through an exclusive tie-up with IBM.

Polaris has launched polarisweblab.com, a Web site to provide
Web solutions to its clients. The lab is based at the company’s new
development center in Chennai on an area of 24,000 Sq ft. It contributed around
16% to the total turnover during the last fiscal and the company projects the
share to be around 30% of the turnover during the current fiscal.

During the current year its offshore development center
located at Navalur near Chennai became operational. It spans an area of around
130,000 Sq ft, can accommodate 800 professionals and was built at a cost of Rs
26 crore. Besides this, the company has commissioned two other development
centers in Chennai and Noida increasing the total number of offshore development
center in India to six, covering over 230,000 Sq ft. The company has also set up
a technology park in Hyderabad and Coimbatore. Its employee strength stood at
1,435 at the end of March 2000.

Polaris currently has three wholly-owned subsidiaries, based
in the UK, Singapore and India. Its offices in the US number four, after opening
two new marketing offices in Atlanta and Los Angeles. During the last fiscal
Polaris merged its US subsidiary Polaris Software Lab Inc with the parent. The
subsidiary now operates as its overseas branch office.

Future plans: Entering emerging areas

Polaris, in its move to enter new areas and leverage its
domain expertise, is making a foray into the insurance market, an area which it
expects to see tremendous demand in the coming fiscal. The company has marked
its entrance into the insurance sector through an alliance with Deloitte
Consulting, USA, and Sherwood, UK, for development and deployment of Amarta and
Act3, the two products of Sherwood International. Polaris foresees potential in
this sector worldwide as well as in the domestic market due to the opening up of
the insurance sector.

In e-commerce, the company entered into an alliance with
US-based TopTier Software to Web-enable banking and financial applications. The
company plans to provide solutions to its clients with the integration of ERP,
EKM, SCM and CRM.

Polaris is expanding its base by setting up new subsidiaries
and development centers. It has received permission from the RBI to set up
subsidiaries in Germany and Australia. These will start functioning in the
current fiscal. The company has acquired land in Gurgaon and Chennai to set up
off-shore development centers. The Chennai center would be completed by
September 2001 and would cover an area of 150,000 Sq ft. The center can house
1,100 professionals. The company also plans to set up a global development
center in the US and offices in Houston, Boston and Chicago during the current
fiscal.

The banking and financial services industry, which is also
the focus area of Polaris, accounts for 20% of the total IT expenditure
worldwide. While there is immense competition among the software companies in
this area, Polaris’ expertise over the last few years would help it
consolidate its position in the segment. Along with this, the company’s foray
into emerging areas of insurance and e-commerce are likely to boost revenues in
the coming years.

Financials

(All figures in Rs crore)

 

1999

2000

2001*

2002*

Turnover

60.3

146.1

266.5

449.7

Other Income

0.3

14.2

4.0

5.0

Operating Profit

16.2

45.2

64.6

112.9

OPM (%)

26.3

21.2

22.8

24.0

Net Profit

14.7

37.2

53.1

94.3

Equity#

13.6

17.1

17.1

17.1

EPS (Rs.)

5.4

10.9

15.6

27.6

* Projected, face value = Rs 5

Year ended March 31

Financial performance: Impressive growth

Polaris earned revenues of Rs 146.1 crore in 1999-00 against
Rs 60.3 crore in fiscal 1998-99. Its operating margin however declined from 26%
to 21% due to higher operational and salary costs. The company’s net profit
jumped 154% to Rs 37.2 crore in fiscal ended March 2000. Excluding the one-time
interest receipts, the net profit growth stood at 87% for the fiscal. In the
first quarter ended June 2000, the company reported a turnover and net profit of
Rs 51.9 crore and Rs 11 crore, respectively. Polaris expects to cross Rs 250
crore in its top line in the current fiscal.

Investment potential: Reasonable value

Polaris shares have a face value of Rs 5 per share and is currently traded at
Rs 687 (September 15) discounting its projected March 2001 EPS by 44 times and
March 2002 EPS by 25 times. The share price of Polaris peaked at Rs 1,600 in
April 2000 and has since declined to the current level due to the overall
correction in valuations of infotech stocks. Although the company’s client
list is small, Polaris is gearing up to spread its wings in the international
market by setting up more offices. Moreover, the foray in emerging areas would
help the company in sustaining the growth that it has reported in the past. A
high dependence on revenues from Citibank continues to remain a cause for
concern. In the long run, the company’s ability to reduce its dependence on
Citibank would reduce its business risk and possibly improve margins.
Nevertheless, the consistently high growth achieved by the company and its
ambitious expansion merits investment. Accumulate on declines.

Sushanto Mitra
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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