Polaris Software Lab Strong Banking Base

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.

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.