Investment Idea - Polaris Software Labs Ltd. : Recommended as "BUY"

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  • 1. October 1, 2010 Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs POLARIS SOFTWARE LABS LTD. BUY Strong Buy Polaris Software Labs Ltd. is a Chennai based mid-tier IT Company focused on servicing Buy the BFSI and Retail Segments. Polaris is the outsourcing partner for 10 of the top 15 banks Hold and 6 of the top 10 Insurance companies and has employed its products among top 200 Reduce Financial Companies. Sell Strong Buy – Expected Returns > 20% p.a. • Financial Services are expected to spend around $380 billion this year in IT. Polaris’ wide Buy – Expected Returns from 10 to 20% p.a. Hold – Expected Returns from 0 % to 10% p.a. portfolio of products under the Intellect suite give it an opportunity to tap BFSI Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk companies with further prospects of cross selling. Sell – Returns < 0 % • The company’s Intellect suite of products for Financial Firms has been implemented at 200 client locations & has won accolades from respected Software consulting & research firms like Gartner, Forrester & Tower. • Citibank contributes to around 40% of revenues and has a stake of 11.5% in the company. STOCK DATA BSE / NSE Code 532254/ POLARIS Polaris will gain with Citi’s stability & its focus on offloading non-core businesses. Bloomberg Code POL IN EQUITY • Polaris is diversifying its revenue away with new products aimed at Retail and Human No. of Shares (Mn) 99 Sensex / Nifty 19,956/5991 Resources. Retail contributes to about 6% of revenues, which will increase going ahead. PRICE DATA CMP Rs (29th Sep' 10) 166.5 • Most Indian IT companies only have Core Banking Solutions in their portfolio, while Beta 1.22 Polaris’ Intellect suite has products dedicated to various verticals in the BFSI industry. Market Cap (Rs mn) 16,472 52 Week High-low 215/139.6 Based on a consolidated FY12 P/E multiple of 10, the fair value for the Average Daily Volume 253,256 company works out to Rs 191. STOCK RETURN (%) 30D 3M 6M 1Y Polaris 1% -7% -4% 11% Sensex 11% 14% 13% 18% Financial Snapshot Nifty 11% 14% 13% 20% Projections (Rs Mn) FY08A FY09A FY10A FY11E FY12E SHARE HOLDING PATTERN (%) Revenue 10,993 13,779 13,538 15,297 17,592 Promoter 29.1 Y-o-Y Growth % 6.5% 25.3% -1.8% 13.0% 15.0% Institution 31.2 Non Institution 39.7 EBIDTA 1,363 2,019 2,147 2,391 2,837 Total 100.0 Y-o-Y Growth % -19.8% 48.1% 6.3% 11.3% 18.7% 1 Year Price Performance (Rel. to Sensex) PAT After MI 732 1,307 1,528 1,657 1,890 50 Y-o-Y Growth % -27.6% 78.5% 16.9% 8.4% 14.0% 40 Sensex Polaris EPS Rs 66.6 13.2 15.4 16.7 19.1 BVPS Rs 68.1 86.2 95.5 99.4 112.2 30 EBIDTA % 12.4% 14.7% 15.9% 15.6% 16.1% 20 NPM % 6.7% 9.5% 11.3% 10.8% 10.7% 10 ROE % 10.5% 15.4% 16.2% 16.9% 17.0% 0 PER x 9.9 8.7 P/B Ratio 1.7 1.5 -10 -20 www.fullertonsecurities.co.in Page | 1
  • 2. October 1, 2010 BUSINESS PROFILE Polaris Software Labs was established in 1993 and initially provided end-to-end banking solutions to Citibank. In FY2010, Polaris’ 43% of revenues come from the US, 30% from the EU & 27% from Asia, even as Citi remains an important client. Intellect, the company’s frontline product has products to cater to the entire BFSI industry. It is based on the Service Polaris has started offering services based Oriented Architecture (SOA), which integrates with older applications and allows for changes to be made easily. on Cloud computing. Polaris currently has a presence in 20 countries in 6 continents. The company’s strategy includes reaching out to Tier 2 & 3 clients. The company recently began offering Cloud Computing based services to Andhra Pradesh State Co-Operative Bank and looks to offer these services to Rural & Co-Operative banks with small budgets. The company in October 2009 acquired Lasersoft for Rs. 52 Crores. Lasersoft has products across the value chain in Banking. The acquisition gave Polaris access to untapped financial verticals. Laser Soft’s focus on India, especially with small Banks & Financial Institutions combined with Polaris’ focus on the larger Financial Institutions broadened Polaris’ reach across various sizes of Financial Institutions. In March 2010, the company acquired IndigoTX, an enterprise brokerage solution used by 5 lakh customers for trading Recent acquisitions broadened Polaris’ various financial instruments like Equities, Derivatives, Commodities and Currencies. This acquisition gave Polaris a presence reach horizontally in in Software as a Service (SaaS) domain. In September 2010, Polaris bought 2.5% in Tyfone, a Portland, USA based company the Financial Space. that provides software & hardware platforms for banks, mobile payments & mobile merchant services. Revenues by region (FY 2010) IT spends by Region( $ billion ) 160 140 27% 120 43% 100 2010 80 2009 60 2008 40 30% 20 0 North America Europe Asia Pacific Europe Americas Asia Pacific Others Intellect, Vendor consolidation, Acquisitions to fuel growth; but business concentration is a risk With vendor consolidation that’s taking place globally, Polaris should benefit with both Software Products & its BPO arm Optimus. Also, the company’s Star Product, Intellect has a wide range of applications to cater to almost all BFSI companies, giving the company scope to cross sell products. With a Cash kitty of over Rs 500 crore, the company has expressed desire to Polaris has a Cash acquire companies to diversify its product & client base. balance of over Rs. 500 crores with zero net However, weakening of the European and American economies further could dampen the outlook, especially given its focus debt & is looking at on one sector. Also, with 40% revenue concentrated in Citibank, Polaris is in a risky position. However, with Polaris’ focus on acquisitions to fuel growth. newer areas like retail and on servicing clients in Emerging markets, this risk will reduce going ahead. Also, Rupee appreciation is a concern, which will reduce as the company increases domestic exposure. www.fullertonsecurities.co.in Page | 2
  • 3. October 1, 2010 BUSINESS PERFORMANCE Strong Revenue Growth ahead…. The company has implemented Intellect at 200 locations globally, adding 54 clients in FY 2010 and 16 new clients in the current quarter. Intellect contributes to 23% of revenues and going ahead, Polaris’ revenues will be driven by Future revenues to be Annual Maintenance charges on Product installations. driven by Annual Maintenance Charges For the Q1FY2011, Total Income grew by 18% to Rs. 3.68bn from Rs. 3.12bn for the same quarter last year. For the same period, EBITDA grew by 33% to Rs. 555.9mn from Rs. 419.3mn and Profit after Tax (PAT) grew by 46% to Rs. 466mn from Rs. 318.4mn. However, over the previous quarter, EBITDA margins declined by 150 bps to 17.3% due to wage hikes. Annual Revenues & Margins Quarterly Performance 20000 18% 3800 20% 18000 16% 3700 18% 16000 3600 16% 14% Revenues (Rs mn) Revenues (Rs mn) 14000 3500 14% Margins(%) Margins(%) 12% 3400 12% 12000 10% 3300 10% 10000 8% 3200 8% 8000 6% 3100 6% 6000 3000 4% 4000 4% 2900 2% 2000 2% 2800 0% 0 0% Revenue (Rs mn) PAT Margins EBITDA Margins Net Revenue (Rs mn) EBITDA Margins Peer Group Comparison Revenue EBIDTA PAT P/E P/B CMP FV Companies ROE (%) (Rs. mn) Margin (%) Margin (%) (x) (x) (Rs.) (Rs.) Polaris 13,538 16% 11% 16% 10.8 1.7 166 5 Hexaware 10,386 17% 13% 15% 8.2 1.3 75 2 Mastek 7,138 13% 9% 12% 9.9 1.2 244 5 *FY10 consolidated figures Peer Comparison Margins are Polaris has profit margins comparable to its peers and has better Returns on Equity. Going forward, we expect the expected to improve margins to reduce initially because of servicing Tier 2 & 3 clients and wage hikes. However, increasing revenues from going ahead. Annual Maintenance charges, Cloud Computing and Services business will improve margins going ahead. www.fullertonsecurities.co.in Page | 3
  • 4. October 1, 2010 VALUATION We estimate Polaris Software’s revenues to grow at a CAGR of 13.9% over FY2010-12 to Rs 17.59bn by Based on a consolidated FY2012. We further estimate that PAT would grow at a CAGR of 11.1% over FY2010-12 to Rs 1.89bn in FY12 P/E multiple of 10, the FY2012 from Rs 1.53bn in FY2010. fair value for the company works out to Rs 191. Based on a consolidated FY12 P/E multiple of 10, the fair value for the company works out to Rs 191. We recommend a ‘BUY’ rating on the stock. Financial Analysis and Projections Particulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E Net Revenue 10,993 13,779 13,538 15,297 17,592 Other Income 198 259 193 196 200 Total Income 11,191 14,039 13,731 15,494 17,792 Operating Expenditure 9,828 12,020 11,584 13,103 14,954 Depreciation 460 505 350 378 397 EBIT 903 1,514 1,797 2,013 2,440 EBIT Margin (%) 8.2% 11.0% 13.3% 13.2% 13.9% Interest 8 7 9 10 10 Profit Before Tax 895 1,507 1,788 2,003 2,430 Less: Tax 161 209 255 340 535 Profit After Tax 734 1,298 1,533 1,662 1,896 Minority Interest 2 -9 4 5 5 PAT After MI 732 1,307 1,528 1,657 1,890 PAT Margin (%) 6.7% 9.5% 11.3% 10.8% 10.7% ROE (%) 10.5% 15.4% 16.2% 16.9% 17.0% EPS (Rs) 66.6 13.2 15.4 16.7 19.1 BVPS (Rs) 68.1 86.2 95.5 99.4 112.2 Valuation Ratios (x) FY11E FY12E P/E 9.9 8.7 P/B 1.7 1.5 www.fullertonsecurities.co.in Page | 4
  • 5. October 1, 2010 Board Of Directors Director Name Current Position Description Mr. Arun Jain is Chairman, Managing Director and Chief Executive Officer of Polaris Software Lab Limited and is the first generation entrepreneur and promoter of the Company. He holds a degree in Electrical Engineering from the Delhi College of Engineering. He is on the Board of Madras Stock Exchange Ltd, a member of Advisory Council of Software Technology Parks of India (STPI) for their functioning of the Chairman, Chief incubation facility and technological innovation in the area of information technology and a key member Arun Jain Executive Officer, in the State Level IT Task Force in Tamil Nadu, India. He is a Director in 4 other Companies and also a Managing Director member of 2 Committees of other Companies. He has also served as Chairman of Tamil Nadu State Council, Confederation of Indian Industry - Southern Region during 2003 - 2004, Chairman of Indo- American Chamber of Commerce - Tamil Nadu Branch during 2001 – 2002 and on the Board of Xavier’s Institute of Management, Bhubaneswar, India. Mr. Abhay Agarwal is the Non-Executive Director of Polaris Software Lab Limited since 1995. He is a member of Audit Committee and Shareholders' Committee of the Company. He is also a Director in Sunshine India (P) Ltd., Dabur Securities (P) Ltd., British Health Products (India) Ltd., Sahiwal Investment & Trading Company, Upvan Farms & Services (P) Ltd., Weltime Investment (P) Ltd.,Param Investments (P) Non-Executive Abhay Agarwal Ltd., Northern Herbal Farms (P) Ltd., Intelligent Information Systems (P) Ltd., Maneswari Trading Director Company, H & B Stores Ltd., Dr.Fresh Property Development (P) Ltd., Dr.Fresh Health Care (P) Ltd., Lite Eat Out Foods (P) Ltd., Super Hoze Industries (P) Ltd., Dr.Fresh Buildcon (P) Ltd., IMB Infrastructure (P) Ltd., KBC India (P) Ltd., Shree Investment (P) Ltd., Elephant India Finance (P) Ltd., and Dr.Fresh SEZ Phase I (P) Ltd., as an alternate director. Mr. Arvind Kumar is the Non-Executive Independent Director of Polaris Software Lab Limited since 1995. Mr. Arvind Kumar, who is an M.A. L.L.B., enrolled as an Advocate on 12th November 1963 at Kanpur from the U.P. Bar Council at Allahabad and practiced in the High Court of Judicature at Allahabad from 1966 to Non-Executive 1972. Later in the year 1972, he shifted to the Supreme Court of India at New Delhi and started practicing Arvind Kumar Independent there. Presently practising as a Senior Advocate in the Supreme Court, he is a reputed corporate legal Director expert and advises Polaris on issues relating to Corporate Governance and other Legal and Statutory Compliance issues. He was appointed as a Director on the Board of Polaris in May 1995 and is acting as chairman of Audit Committee of the Company. Mr. Satya Pal is the Non-Executive Independent Director of Polaris Software Lab Limited since April 1997. He is a graduate in Electrical Technology and Electrical Communication Engineering from Indian Institute Non-Executive of Science, Bangalore, Mr. Satya Pal joined the Department of Telecommunications in 1955 and became Satya Pal Independent Member of Telecom Board in 1986. In 1988, he became Secretary, Department of Telecommunications; Director Chairman, Telecom Board and Chairman, MTNL. He is also a Director of Paramount Communications Limited and Member of its Audit Committee and Chairman of its Remuneration Committee. Dr. Ashok Jhunjhunwala, Ph.D., is the Non-Executive Independent Director of Polaris Software Lab Limited since 2001. He is a Professor in the Department of Electrical Engineering, Indian Institute of Technology, Chennai, India. He received his B.Tech degree from IIT, Kanpur, and his MS and Ph.D degrees Non-Executive from the University of Maine. From 1979 to 1981, he was with Washington State University as Assistant Ashok Independent Professor. He chairs Rural Technology and Business Incubator (RTBI) at IIT Madras and Mobile Payment Jhunjhunwala Director Forum of India (MPFI). Dr. Ashok Jhunjhunwala has been awarded Padma Shri in the year 2002. He is a Fellow of World Wireless Research forum, IEEE and Indian academies including INAE, IAS, INSA and NAS. Dr. Jhunjhunwala is a Director in the Board of State Bank of India, TTML, 3i Infotech, Sasken, Tejas, IDRBT, Tata Communications and Exicom. Mr. R. C. Bhargava is the Non-Executive Independent Director of Polaris Software Lab Limited since 1999. He is a postgraduate in Mathematics from Allahabad University, India, Mr.Bhargava joined the Indian Administrative Service (I.A.S.), in 1956. He is also a postgraduate in Development Economics from Non-Executive Williams College, Williamstown (Mass), USA. From 1968 to 73, he was the Agricultural Production R.C. Bhargava Independent Commissioner and Secretary to the Government of the State of Jammu and Kashmir for the Departments Director of Agriculture, Horticulture, Animal Husbandry, Forests and Co-operation. He joined the Board of Polaris in March, 1999. He chairs the Remuneration & Compensation Committee and is a member of the Audit Committee of Polaris. Mr. Raju Venkatraman is the Non-Executive Independent Director of Polaris Software Lab Limited since 2005. He is presently the Managing Director & CEO of MEDall Medical Services Pvt Ltd. His career in technology outsourcing began with EDS. In EDS, Mr. Raju Venkatraman spearheaded the applications Non-Executive Raju outsourcing business (now called BPO) in a variety of verticals including Healthcare, Manufacturing and Independent Venkatraman Federal Government. Scaling his original company to nearly 4,000 employees/contractors, he sold it to Director Lason, incorporated in 1998. He is a chemical engineering graduate from IIT, Chennai and holds an executive MBA from IIM, Ahmedabad. Mr. Raju Venkatraman joined the Board of Polaris on 30th December 2005 and is a Member of the Shareholders' Committee of the Company also. www.fullertonsecurities.co.in Page | 5