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					Polaris Software
Laboratories Ltd
Initiating Coverage                                                                          Polaris Software Laboratories Ltd
Recommendation                                               BUY                    Snapshot
                                                                       Polaris is a recognized global leader in Specialty Application
CMP (07/12/2009)                                           Rs. 177
                                                                       Development for the Banking, Financial and Insurance sector, with its
Sector                                         Information Technology comprehensive portfolio of products, smart legacy modernization
Stock Details                                                          services and consulting. Company’s top-line has grown with a CAGR
                                                                       of more than 25% during FY 2002- FY 2009. Polaris has made some
BSE Code                                                       532254
                                                                       acquisitions recently to further fuel its top-line growth and build a
NSE Code                                                      POLARIS portfolio of comprehensive solutions for core banking, corporate
Bloomberg Code                                                  POL IN banking, wealth and asset management and insurance.
Market Cap (Rs. cr)                                           1747.98
Free Float (%)                                                             53.88    Key Positives
52- wk HI/Lo                                                        192.4/26.3              Polaris’ client base for Intellect products has been increasing
Avg. volume BSE (Monthly)                                              461345                constantly over last few quarters and thereby providing
Face Value                                                             Rs.5.00               earnings visibility for the company.
Dividend                                                                    55%             Expanding presence in emerging economies to further boost
Shares o/s (Crs)                                                            9.87             the company’s top-line growth. Recently company has
Relative Performance                 1Mth            3Mth               1Yr                  expanded its presence in Vietanam, Egypt and Chile and
Polaris                                7.4%           26.1%            382.6%                continues to look for expanding its geographic presence
                                                                                             thereby reducing the dependence on the US and Europe.
Sensex                                 2.9%               5.3%             85.4%
    18000                                                                  220              Constant thrust for acquisition has enabled Polari’s to
    16000                                                                                    register strong growth over last couple of years. The recent
    14000                                                                                    acquisition of Laser Soft Infosystem Ltd (Laser Soft) will not
                                                                           120
    12000                                                                                    only assist the Polaris’ top-line growth but will also provide it
    10000                                                                                    with 40 customers of Laser Soft.
     8000                                                                  20
                                                                                            Strong balance sheet and cash position to enable more
          Dec-08       Mar-09         Jun-09              Sep-09
                                                                                             acquisitions going forward.
                            Sensex              Polaris

                                                                                    Valuation & Recommendation
Shareholding Pattern as of 30/09/2009
                                                                                    At the current market price of Rs 177 per share, Polaris is currently
Promoters Holding                                                      29.16%       trading at a PE of 12.32x FY10E and 9.58x FY11E EPS estimates, which
Institutional (Incl. FII)                                              34.39%       looks quite attractive. Based on our estimated EPS of Rs 18.48 for FY
Corporate Bodies                                                       20.11%       2011 and a target PE multiple of 13.0x we arrive at a target price of
                                                                                    Rs. 240 per share for Polaris. We recommend a BUY rating on the
Public & others                                            16.34%
                                                                                    stock with a long term view.
Ashish Khetan – Research Analyst           (+91 22 3027-2259)
ashish.khetan@nirmalbang.com
Year                Net Sales         Growth %                EBITDA             Margin %         PAT         EPS          PE         P/BV         ROE %
FY 2008A             1,099.3            6.5%                   118.2              10.8%           73.2        7.42        23.87       2.66         11.1%
FY 2009A             1,377.9            25.3%                      233.5           16.9%         130.7       13.25        13.37       2.26          16.9%
FY 2010E             1,347.0            -2.2%                      227.6           16.9%         141.9       14.38        12.32       1.98          16.1%
FY 2011E             1,497.0            11.1%                      260.2           17.4%         182.4       18.48        9.58        1.69          17.7%
Initiating Coverage                                        Polaris Software Laboratories Ltd
                      Company Background
                      Polaris Software Laboratories Ltd (Polaris) was founded in 1993. Polaris is a recognized global
                      leader in Specialty Application Development for the Banking, Financial and Insurance sector, with
                      its comprehensive portfolio of products, smart legacy modernization services and consulting.
                      Polaris started providing retail banking solution to Citi Bank in India in 1994. Currently, Citi Bank
                      remains the company’s largest customer accounting for more than 40% of the company’s
                      revenues. Citi Bank also took a 43% stake in the company after the merger. Citigroup holds stake in
                      Polaris through two entities viz, OrbiTech Ltd and Citibank A/C CVC. However, recently Citigroup
                      has reduced its holding in Polaris to 39%.

                      Over the years Polaris established its solutions and services footprint globally. Headquartered in
                      Chennai, India, the company has presence in Australia, Bahrain, France, Germany, Hongkong,
                      Ireland, Japan, Korea, Saudi Arabia, UAE, Singapore, Switzerland, United Kingdom, United States
                      and Canada through its work field offices. It has opened subsidiaries in many of these countries.

                      Revenue by Geography (Q2 FY10)




                                                21.4%
                                                             43.0%
                                        8.1%

                                                 27.5%


                                     US/North America       Europe
                                     India                  Asia Pacific & Japan
                      Source: Company data

                      Polaris has significant exposure to US and Europe from where company’s records its 70% of the
                      total revenues. However, going forward we believe that with the acquisition of Laser Soft and
                      company’s thrust on expanding business in other emerging economies will help the company
                      reduce its dependence on the US and Europe. Going forward, we expect the contribution from
                      India to increase with the acquisition of Laser Soft. In the long term, Management expects the
                      revenue contribution from India to increase to 10%.

                      In 2003, Polaris acquired Citibank's banking IT arm OrbiTech Solutions and transformed it into the
                      world's leading Financial Technology Corporation. Polaris also launched Intellect and Optimus in
                      2003 which remains the company’s top selling products.
Initiating Coverage                                          Polaris Software Laboratories Ltd
                      Business Model




                      Polaris is the chosen outsourcing partner for 10 of the top 15 global banks and 6 of the 10 top
                      global insurance companies. Polaris offers comprehensive solutions for core banking, corporate
                      banking, wealth and asset management and insurance.

                      Products
                      Polaris provides software products for banking sector. Intellect Suite is the company’s flagship
                      product and provides a variety of solutions to the customers

                      Intellect Suite

                      Intellect Suite is a modern and proven enterprise platform that meets the needs of retail,
                      corporate and investment banking. It enables banking across business units, geographies and
                      technologies. The platform is web-enabled, multi-currency and multi-lingual which enables the
                      banks to service markets in diverse geographies and cultures.

                      Intellect is based on (Service Oriented Architecture) SOA architecture and is built with re-usable
                      Business Applications and Components, which makes it highly modular and flexible. Intellect has 9
                      products and 20 independent saleable modules.

                      Polaris’ Intellect Suit consists of following modules
                           Universal Banking
                           Consumer Finance (includes Lending and Collect)
                           Credit Card solution
                           Risk & Treasury solution
                           Portals and Internet Banking
                           Cash and Liquidity solution
                           Wealth Management solution
                           Custody solution

                      Intellect enables cross-selling and up-selling by its versatile ‘Single customer view’ and helps tellers
                      to perform smart service. The following graph gives a snapshot of the company’s product offerings.
Initiating Coverage                                             Polaris Software Laboratories Ltd




                       Source: Company website


                       Services

                       Polaris provides application management services to maintain, reengineer, aggregate and
                       upgrade portfolios of business applications cost-effectively by leveraging its continuously
                       replenished warehouse of intellectual property. Polaris provides services in six areas namely
                       Technology, Enterprise solutions, Testing, Performance Engineering, Domain led and
                       Infrastructure led.


                                                           Services offered



        Technology      Enterprise               Testing            Performance    Domain         Infrastructure
                        Solutions                                   Engineering     Led                Led

      Microsoft .NET   Oracle               Pace                    Performance   Risk &         ITEMS
      IBM Mainframe    SAP                  Calypso                 Engineering   Treasury
                       Infor BaaN
                       Siebel
                       DWH/BI
                       ECM

                       Source: Company data, Nirmal Bang Research
Initiating Coverage                                        Polaris Software Laboratories Ltd
                      BPO
                      Polaris provides outsourcing solutions in four areas; Retail Banking, Corporate Banking, Investment
                      Banking and Insurance.

                      Retail Banking
                      Company’s major offerings in Retail Banking include Retail Banking solutions and services, Credit
                      cards, Internet Banking, Mortgages practice and Multi-Channel Integration.

                      Corporate Banking
                      Polaris custom solutions in Corporate Banking includes Risk and Treasury Management , Cash
                      Management, Portals and Trade Finance.

                      Investment Banking
                      With the right combination of business analysts, project managers and developers, experienced in
                      the Investment Banking domain, Polaris has delivered several projects in complex areas like
                      Custody Solutions, Mutual Funds, Portfolio Management and Securities Administration across
                      geographies.

                      Insurance
                      As a technology partner of global insurance clients, Polaris combines the understanding of
                      insurance industry requirements with the technology expertise to develop and deliver
                      techno-business solutions.

                      Revenues by Products/Services (Q2 10)


                                                                  17%
                                                                              3%      1%
                                                                                   1%



                                                     78%


                                  Intllect Product     BPO revenue             PRIL

                                  SEEC                 Other soft servieces
                      Source: Company data

                      Polaris generates majority of its revenues through software services segment. Revenue
                      contribution from products has remains in the range of 18-20% over last 2-3 years. Revenues from
                      BPO business has declined significantly over last 4 quarters reflecting the slowdown in the global
                      economy.
Initiating Coverage                                           Polaris Software Laboratories Ltd
                      Revenues by Industry verticals (FY 2009)

                                                      9%




                                                            91%


                                             BFSI    Emerging verticals

                      Source: Company data

                      Polaris caters primarily to BFSI sector and generates more than 90% of its total revenues from this
                      segment. It recently entered into retail space though its subsidiary (PRIL) in order to expand the
                      opportunities presented by retail sector.

                      Revenues Mix

                      Polaris has historically focused on onsite delivery location which is evident from the company’s
                      onsite and offshore revenues mix. However, since the recent slowdown company has to shift its
                      focus on offshore delivery which has impacted the company’s top-line to some extent. Going
                      forward, the Management expects the contribution of onsite revenues to increase to the historical
                      levels of 58-60% from the current 51% in Q2 FY 2010.

                         70.0%
                         60.0%
                         50.0%
                         40.0%
                         30.0%
                         20.0%
                         10.0%
                           0.0%
                                      Q1 09         Q2 09      Q3 09      Q4 09    Q1 10       Q1 10
                                                            Onsite   Offshore
                      Source: Company data

                      Utilization Rate

                      Utilization rate has constantly increased over last 3-4 quarters reflecting the cost cutting strategy
                      of the company.
Initiating Coverage                                         Polaris Software Laboratories Ltd
                          82.0%
                          80.0%
                          78.0%
                          76.0%
                          74.0%
                          72.0%
                          70.0%
                          68.0%



                      Source: Company data

                      Major Subsidiaries

                      Optimus
                      In 2002, Polaris formed Optimus Global Services Ltd (Optimus) with a view to enter in the BPO
                      segment. Optimus acquired Bangalore based customer interaction services company iBackoffice to
                      get immediate entry into the BPO space. Moreover, through this acquisition Optimus got access to
                      ready-to-use infrastructure and skilled staff including key Management staff and the client base of
                      iBackoffice including contracts in the pipeline.

                      Optimus provides a complete spectrum of back office services in the banking and financial services
                      sector. During recent years, in order to reduce the dependency on the Banking segment, Polaris
                      plans to expand its footprint in the fast emerging and rapidly growing Insurance & Telecom
                      verticals. In FY 2009, revenues from Optimus increased 10.3% to Rs. 61.61 Crs contributing around
                      4.5% to the company’s total revenues.

                      SEEC Inc
                      Polaris acquired 100% stake in SEEC Inc in November 2008 for cash consideration of US$ 7 mn. As
                      part of the transaction Polaris also acquired SEEC’s Intellectual Property Rights worth US$ 1 mn.
                      SEEC Inc is a US based Product and Component Services company focused on the Insurance
                      vertical. SEEC Inc is engaged in the business of developing, marketing, selling, supporting business
                      component and application management software solutions for clients primarily in Life &
                      Annuities, P&C and Healthcare Insurance.

                      This acquisition will enhance the company’s product portfolio and extend its footprint into the
                      Insurance vertical. After the acquisition, SEEC Inc was renamed to “Intellect SEEC Inc” by Polaris.
                      The subsidiary reported revenues of Rs 9.84 Crs and profit of Rs 0.80 Cr during Nov 08 –Mar 09.

                      PRIL
                      In order to enter in fast growing retail segment Polaris formed Polaris Retail Infotech Limited (PRIL)
                      in November 1998 as its wholly owned subsidiary. PRIL caters to the needs of large, midsized and
                      small format retailers across categories and geographies. It offers Products, Services & Consulting
                      addressing the retailer’s needs ranging from building efficient check out system, Merchandise &
                      Planning Systems, Supply chain Management system to specialized offering like Quebusting, RIFD
                      & E-tailing.
Initiating Coverage                                                    Polaris Software Laboratories Ltd
                      Industry Analysis
                      The global IT industry’s revenues increased 5.6% y-o-y to US$1,560 bn in 2008 (Source: CRISIL).
                      Going forward, the IT industry’s revenues is expected to grow at a moderate growth of 3.5% y-o-y
                      in 2009 on the back of lower IT spending by the clients owing to the slowdown. However, with the
                      economic recovery the demand for IT is expected to increase rapidly in the long term. CRISIL
                      expects the global IT spending to increase at a CAGR of 5.2% over 2008-2012.

                      Global IT spending forecast
                         2,000


                         1,500                                                                              683
                                                                                                652
                                                                       597         620
                                        570           594
                         1,000                                                                  349         376
                                                                       308         326
                                        277           295                                                   181
                                                                       131         146          164
                                        103           115
                           500
                                        528           557              578         605          636         672

                              0
                                       2007          2008          2009E          2010E    2011E          2012E

                                                  Hardware             Software      ITES-BPO         IT Service
                      Source: International Data Corporation, CRISIL

                      The Indian IT industry has been growing at a CAGR of 27.0% over the last 5 years (2004-2009).
                      However, the growth rate declined significantly to 11.8% in FY 2009 owing to recession in key
                      markets of the US and the UK. The US continues to be the largest export market for Indian IT and
                      ITES services accounting for approximately 60% of the India’s total IT exports. Moreover, clients
                      across all regions are adopting cost cutting measures and seeking concessions on billing rates from
                      the vendors to combat the recession.

                      The Indian IT industry is estimated to have registered revenues of approximately US$71.7 bn in FY
                      2009 with IT software, BPO and IT services industry accounting for US$59.6 bn of these revenues.
                      The share of this sector as a percentage of India’s total export has increased from less than 4% to
                      in FY 1998 to approximately 16% in FY 2008.
Initiating Coverage                                          Polaris Software Laboratories Ltd
                      Revenues from Indian IT industry (excluding Hardware)

                               80                                                                       40.0%


                               60                                                                       30.0%
                      US$ bn




                                                                                                                 %
                               40                                                                       20.0%


                               20                                                                       10.0%


                                0                                                                       0.0%
                                      FY 2005     FY 2006      FY 2007     FY 2008     FY 2009 E
                               IT Services    ITES-BPO       Software products & engineering services          y-o-y
                      Source: NASSCOM, CRISIL


                      India’s IT-BPO industry’s export revenues are estimated to be approximately US$47.3 bn in FY 2009
                      (accounting for 66 per cent of the total IT-BPO industry revenues). The IT industry’s export growth
                      rate plunged to around 16% in FY 2009 as compared to 29.0% in 2008. However, the growth
                      prospects for the IT sector looks bright with the improvement in the global economy.

                      The BFSI industry is the largest customer of the IT services accounting for approximately 40% of
                      the India’s total IT-ITeS exports. The performance of the BFSI sector is closely related to the
                      economic cycles. Therefore, given the slowdown in the major markets (the US and the UK) and the
                      global financial turmoil the demand for IT and ITeS is expected to remain low in near to medium
                      term.

                      India’s IT exports by industry verticals (FY 2009E)

                                                     3% 3%
                                                4%
                                                             5%
                                                3%

                                                                      40%
                                                     8%

                                                     15%

                                                             19%

                               BFSI                                 Hi-tech / Telecom
                               Manufacturing                        Retail
                               Media, publishing & entertainment    Construction & utilities
                               Healthcare                           Airlines & transportation
                               Other
                      Source: CRISIL
Initiating Coverage                                           Polaris Software Laboratories Ltd
                      IT services revenue growth and hiring
                         50%

                         40%

                         30%

                         20%

                         10%

                          0%
                                  FY 2004        FY 2005   FY 2006   FY 2007   FY 2008     FY 2009 E
                                                Revenues growth        Employee addition
                      Source: NASSCOM, CRISIL


                      There is high correlation between the top-line growth of IT companies and its employee’s growth.
                      With the decline in top-line in 2008 the IT companies reduced its employee growth rate to control
                      the cost.
Initiating Coverage                                        Polaris Software Laboratories Ltd
                      Investment Rationale

                      Strong client base

                      Over the years company has established strong client base. Polaris has strong geographic presence
                      and has developed client in many emerging countries in recent years. With more than 200
                      customers for Intellect Global Universal Banking Platform, Polaris continues to expand its reach. In
                      the IT services space company caters to 15 of the top 25 banks globally. In all company have 53
                      large customers. While Citigroup continues to be major client, some of the other global clients of
                      the company are SEB, Shinsei Bank, Mekong Housing Bank, and Deutsche Leasing. In India, Axis
                      Bank, HDFC Bank, and ICICI Bank are clients. With the Laser Soft acquisition Polaris has acquired 40
                      new accounts majority of which includes the Indian banks. SBI, Corporation Bank and Andhra Bank
                      are a few clients among the 12 PSU banks that Laser Soft caters to. The insurance client base
                      includes 6 of the top 10 insurance companies globally. With the acquisition of SEEC, company
                      intends to further expand its presence in insurance. AIG, New York Life, ICICI Prudential, Kiln, IDBI
                      Fortis are some of the company’s major client in insurance segment. We believe that this strong
                      client base will enable the company to register steady revenue growth in the long term.

                      Increased in Global IT spending to boost company’s growth prospect

                      With the expected improvement in the global economy and increased client spending on IT we
                      expect the demand for IT products and services to remain high in the long term despite the short
                      term challenges. In the Indian Economic Summit on 10 November 2009, the NASSCOM’s president
                      said that NASSCOM expects the Indian IT sector to grow at 4%-7% during FY 2010. However,
                      NASSCOM expects the IT sector to return to double digit growth from FY 2010 which the industry
                      has witnessed over last few years. Moreover, NASSCOM expects the IT industry to grow at a CAGR
                      of 14% for next 10-12 years and expect it to reach to around $225 bn by 2020 from $50 bn at the
                      end of FY 2009. We believe that the overall growth in the IT sector will boost the company’s
                      growth prospects and enable it to grow further.

                      Constant client addition

                      Polaris has successfully expanded its client portfolio over last few quarters. Company has
                      consistently added more than 10 clients every quarter during last 3-4 years. Moreover, clients for
                      company’s major product ‘Intellect’ is increasing over last couple of quarters which indicates
                      increasing demand from clients. In Q2 FY10, Polaris recorded 12 wins for its Intellect product.
                      Recently Polaris also signed a contract with Vietnam-based Saigon Hanoi Bank wherein company
                      will provide “Global Universal Banking — Intellect 10.0” platform to the bank which will comprise
                      of core, lending, trade, treasury and Portal functionalities of Intellect 10.0. Going forward, we
                      believe that with the increased demand for IT sector company will be able boost its client base
                      which will benefit the company in the long term.
Initiating Coverage                                                Polaris Software Laboratories Ltd
                      Client wins over last 3 years
                             25

                             20

                             15

                             10

                              5

                              0



                      Source: Company data, Nirmal Bang Research


                      Strong product portfolio

                      Polaris’ product Intellect has gained strong footing in the international market. Over the last few
                      years company’s revenues from product has increased consistently indicating the increased
                      demand for the product. Company’s Intellect Product Suite consists of 9 products and 20
                      independent saleable modules. The Banking suite achieved 21 wins during FY 2009 and is
                      continued to be ranked among the leading global banking platforms by Market Analysts.
                      Moreover, company’s product has gained traction in various geographies. The company’s product
                      saw success in markets beyond US and UK, such as Latin America and Vietnam by winning
                      prestigious deals from leading local Banks. Going forward, the company plans to expand Intellect’s
                      reach to more than 50 countries by 2013.

                      Intellect Product Client wins
                             14
                             12
                             10
                              8
                              6
                              4
                              2
                              0



                      Source: Company data, Nirmal Bang Research
Initiating Coverage                                                Polaris Software Laboratories Ltd
                      Acquisitions to bolster top-line growth

                      Along with the organic growth, Polaris’ thrust for inorganic growth avenues has enabled the
                      company to expand its top-line. Polaris’ strategic acquisition of SEEC Inc, a leading SOA product
                      line for the Insurance segment added to the competitive edge of the company in the Insurance
                      Vertical and also provided competitive edge in the Legacy Modernization space through SEEC’s
                      Application Management Suite. SEEC acquisition marked the company’s foray into the Insurance
                      Vertical globally, with the launch of a comprehensive offering stack for this segment. With this
                      acquisition company’s clients increased to 23 in the insurance segment including 6 of the top 10
                      insurance companies as its customers.

                      Polaris continued its hunger for acquisition and acquired Laser Soft Infosystems Ltd (Laser Soft) in
                      Q3 FY10. Laser Soft is a leading banking software products company, specializing in serving the
                      unique needs of India & emerging markets. It has proven solutions in Core Banking, Trade Finance,
                      Treasury, Cash Management, Mutual Funds and Loans serving over 50 customers including leading
                      banks such as Corporation Bank, State Bank of India, ICICI Bank, Mashreq bank, Catholic Syrian
                      Bank, Andhra Bank, EXIM Bank of Tanzania and KEP Trust, Kosovo. With this acquisition and
                      company’s Intellect product the company intends to build a robust and complementary solution-
                      set that is uniquely suitable for emerging markets and will support its market proliferation
                      plan. Polaris has acquired Laser Soft for Rs 52 Crs of which Rs. 35 crores will be paid in cash on
                      closing of the transaction and the balance amount will be paid out in 2 years contingent to
                      performance, and will be funded entirely through the company’s internal accruals. The acquisition
                      is expected to add Rs 48-50 Crs of revenues in one year (November 2009 to October 2009) and will
                      increase the EPS by Rs 0.80 to 1 during the same peiod. We believe that this acquisition will boost
                      the company’s presence in India and will enable it to expand its product portfolio. With the
                      acquisition, Polaris will get access to 40 clients of Laser Soft in India and other emerging countries.
                      Moreover, Polaris’ plan to take Laser Soft’s core banking product to other emerging economies
                      further adds optimism to our outlook.

                      Strong balance sheet

                      Polaris has maintained a strong balance sheet. Over the last few years company has consistently
                      increased its cash balance despite pursuing acquisitions. The company’s cash and cash equivalent
                      balance has increased from Rs 134 Crs at the end of FY 2007 to Rs 349 Crs at the end of FY 2009
                      which has strengthened to Rs 443 Crs at the end of Q2 FY10. Despite paying Rs 35 Crs for the Laser
                      Soft acquisition, we expect the company’s cash position to remain strong. Polaris’ cash per share
                      stands at approximately Rs 45 which we believe is very strong as compared to some of its larger
                      peers. We believe that company’s strong balance will enable the company to go for further
                      inorganic growth in coming years.

                                        Company                          Cash / M. Cap
                      Pol aris Software Lab                                              25.5%
                      Mastek Ltd                                                         20.5%
                      MindTree Ltd                                                        3.6%
                      Hexaware                                                           29.8%
                      Nucleus                                                            33.0%
                      Source: Company data, Nirmal Bang Research
Initiating Coverage                                             Polaris Software Laboratories Ltd
                      Hedging strategies

                      Revenues of IT companies are adversely impacted due to appreciation of INR against US dollar. INR
                      has appreciated sharply over last few months and its constant appreciation is expected to hurt the
                      top-line of IT players in FY 2011. In this scenario, Polaris is well placed as compared to some of the
                      peers as company has entered into hedging contracts at a rate or Rs. 48.20 for FY 2011 to the
                      extent of US$ 100 mn (30%-35% of the company’s expected top-line for FY 2011). This will partially
                      mitigate the impact of appreciation of INR in FY 2011.
                         54
                         52
                         50
                         48
                         46
                         44
                         42
                          Dec-08              Mar-09            Jun-09         Sep-09            Dec-09
                      Source: Bloomberg, Nirmal Bang Research

                      Risks & Concerns

                      Slow recovery in the economy will keep IT spending subdued

                      We expect that the recovery in the global economy will create strong growth opportunities for the
                      company and increased IT spending will lead to higher top-line growth for the company. However,
                      if the economy remains under pressure or the pace of recovery is very slow then it will adversely
                      impact the IT spending budgets of the clients and would thereby lead to lower growth of the IT
                      industry. This would hamper the company’s top-line and margin growth and would lead to a
                      deviation from our estimates.

                      Client concentration can hamper top-line growth

                      Citi group continues to be the company’s largest revenue generator. Although Citi group’s
                      contribution to total revenues has gone down over last 3 years from around 58% in end of FY 2006
                      to around 40% in FY 2009 it still remain very high which could adversely impact the company going
                      forward in case the Citi group adopts cost cutting measures. Moreover, company generates
                      approximately 50%-55% of its revenues from top 10 clients and if the company stands to lose any
                      of its major client, its revenues and margins will be adversely impacted.

                      High exposure to BFSI vertical remains a concern

                      Polaris’ generates more than 90% of its revenues from BFSI vertical and is therefore highly exposed
                      the volatility in the BFSI sector. Although company has started to make efforts to diversify its
                      business vertical through entering into retail space through PRIL, the contribution from PRIL
                      remains very negligible to the company’s top-line. If the economy fails to recovers and the impact
                      of financial crisis intensifies further the BFSI industry’s top-line will suffer the most which will
Initiating Coverage                                                Polaris Software Laboratories Ltd
                      negatively impact the growth prospects for the company and thereby will lead to a deviation from
                      our estimates.

                      The Year so Far

                               Polaris’s reported revenues grew 3.9% q-o-q to Rs. 338.3 crs in Q2 FY10 primarily driven
                                by increase in volumes. On a y-o-y basis, revenues were marginally down by 1.8% due to
                                decline in revenues from the BPO segment.

                               The company reported EBITDA of Rs. 53.5 crs in Q2 FY10 as compared to Rs. 55.2 crs in
                                Q1 FY10 due to increase in software development expenses. Consequently, EBITDA
                                margins declined 110 bps to 15.9% in Q2 FY10.

                               Polaris reported net profit of Rs. 35.2 crs in Q2 FY10 as compared to Rs. 31.8 crs in Q1
                                FY10 registering growth of 10.2% y-o-y. Adjusted net income (after adjusting for profit on
                                investment and one time amortization of intangibles in Q2 FY09) increased 6.2% y-o-y.

                       Income Statement (in Rs Crs.)
                                                                    Q2 FY10    Q1 FY10    Q-o-Q    Q2 FY09    Y-o-Y


                       Revenues                                      338.31      325.53    3.9%      344.41    -1.8%
                       Softwa re devel opment expenses               220.65      207.86    6.2%      229.17    -3.7%
                       Gros s profit                                 117.65      117.67    0.0%      115.24    2.1%


                       General & Admini strati on exp                 28.26       27.70    2.0%       30.11    -6.2%
                       Sel li ng & Ma rketi ng e xp                   35.52       34.74    2.2%       34.35    3.4%
                       EBITDA                                         53.88       55.23    -2.5%      50.78    6.1%
                       margin                                         15.9%      17.0%               14.7%
                       Depreci a ti on & Amortiza ti on                8.74        8.44    3.5%       10.79   -19.1%
                       Fi nance cha rges                               0.17        0.17    0.4%        0.17    4.8%
                       Excha nge ga in/(l oss )                        -8.58     -13.30   -35.5%       0.00     N/A
                       Other income                                    4.05        4.29    -5.6%       0.00     N/A
                       Profi t on sa l e of Inves tments               0.00        0.00     N/A       13.01     N/A
                       Sha re of as s oci a te compa ni es             -0.42       0.00     N/A       -0.68   -39.2%
                        Inta ngi ble As s ets - Amortized ful ly       0.00        0.00     N/A      -11.73     N/A
                       Income before taxes                            40.02       37.60    6.4%       40.42    -1.0%
                       margin                                         11.8%      11.6%               11.7%
                       Income taxes                                    4.82        5.77                5.99
                       Net income                                     35.20       31.84   10.6%       34.43    2.2%
                       margin                                         10.4%       9.8%               10.0%
                       Adjusted net income                            35.20       31.84   10.6%       33.15    6.2%
                       margin                                         10.4%       9.8%                9.6%
                       Source: Company data, Nirmal Bang Research
Initiating Coverage                                                              Polaris Software Laboratories Ltd
                                      Peer Comparison

                                      The company has reported strong sales growth in FY 2009. We are comparing Polaris with Mastek
                                      Ltd, Mindtree Ltd, Heaxware Technologies Ltd (Hexaware) and Nucleus Software Exports Ltd
                                      (Nucleus) as these company’s operate in similar business and has significant exposure to BFSI
                                      sector. Polaris has witnessed a CAGR growth of 25% in its top-line during FY 2002-2009 which is
                                      higher than that of Mastek Ltd and Hexaware. Polaris has very insignificant debt in its book as
                                      compared some of its peers. On the valuation front, Polaris is currently trading at 12.82x P/E based
                                      on TTM earnings which is marginally above the per group average of 12.58x. The company is
                                      currently trading at 2.08x P/BV as compared to the per group average of 2.43x. Furthermore the
                                      company is currently trading at an EV/EBITDA multiple of 5.29x as compared to industry average of
                                      5.83x. Based on these multiples Polaris looks fairly attractive as compared to its peers.

  Company                      Sales         M. Cap          EV          Price     EPS      PE     RONW      EV/ S EV/ EBIDTA P/ BV
                               (Rs Crs)      (Rs Crs)        (Rs Crs)                       (x)     (%)       (x)      (x)      (x)
  Polaris Software Lab           1,373.7       1,747.9         1,301.8   177.1     13.81   12.82   16.2%     0.95     5.29     2.08
  Mastek Ltd                      874.2        1,113.8          943.9    412.5     46.81   8.81    23.8%     1.08     6.34     2.10
  MindTree Ltd                   1,321.5       2,650.8         2,557.3   676.4     34.24   19.75   24.2%     1.94     8.14     4.79
  Hexaware                       1,092.0       1,350.3          966.4    94.0       8.02   11.71   14.4%     0.88     4.58     1.69
  Nucleus                         321.3         393.3           263.5    121.5     12.41   9.79    15.3%     0.82     4.79     1.50
  Industry Average                                                                         12.58   18.8%     1.13     5.83    2.43
  *TTM Basis
  Source: Company Data, Capital Line, Nirmal Bang Research
Initiating Coverage                                          Polaris Software Laboratories Ltd
                      Valuation & Recommendation

                      We expect the company’s EPS to increase from Rs 13.25 in FY 2009 to Rs 14.38 in FY 2010. We
                      expect strong top-line growth in FY 2011 driven by increase in demand and acquisition of Laser
                      Soft. Moreover, expect the company’s EBITDA margins to increase over next couple of years
                      reflecting the cost cutting measures adopted by the company. Consequently, we expect EPS to
                      increase 28.5% in FY 2011 to Rs 18.48.

                      During March 2004 to July 2007, company’s PE multiple has remained above 15.0x. However, after
                      the financial meltdown and global slowdown the multiple declined very sharply. Currently Polaris’
                      is trading at a PE multiple of around 12.82x. Going forward, we believe that the company’s PE
                      multiple will increase with the expected growth in the top-line and bottom-line. Our target PE
                      multiple of 13.0x is broadly in line with the average of the peer group multiple. Based on the target
                      PE of 13.0x and our estimated EPS of Rs 18.38 we get a target price of Rs. 240 for Polaris which
                      represents a 35.6% upside from the current levels. We recommend a BUY rating on the stock with
                      a long term view.

                                                                       P/E Band
                          400

                          350

                          300

                          250

                          200

                          150

                          100

                           50

                            0
                            Mar-04          Mar-05        Mar-06         Mar-07       Mar-08       Apr-09

                                     PSL        PER - 5     PER - 10       PER - 15     PER - 20     PER - 25

                       Source: Nirmal Bang Research
Initiating Coverage                                                  Polaris Software Laboratories Ltd
Income Statement (in Rs Crs.)
                                             2007      2008      2009      2010E     2011E     2012E

Revenues                                     1,032.4   1,099.3   1,377.9   1,347.0   1,497.0   1,646.7
Software development expenses                658.3     744.7     885.4     868.8     961.1     1,050.6
Gross profit                                 374.1     354.6     492.5     478.2     535.9     596.1


General & Administration exp                 102.1     111.3     122.3     118.5     130.2     141.6
Selling & Marketing exp                      110.7     125.1     136.8     132.0     145.5     158.1
EBITDA                                       161.3     118.2     233.5     227.6     260.2     296.4
margin                                       15.6%     10.8%     16.9%     16.9%     17.4%     18.0%


Depreciation & Amortization                   48.1      46.0      50.5      52.3      57.4      60.7
Finance charges                                0.8       0.8       0.7       0.9       0.7       0.7
Exchange gain/(loss)                           0.0      14.5      -56.4     -21.9      0.0       0.0
Other income                                   6.2       3.7      24.8      15.7      19.2      25.2
Share of associate companies                   2.4      -0.2       0.9       0.9       0.9       0.9
Income before taxes                          121.0      89.3     151.6     169.2     222.2     261.1
Income taxes                                  19.9      16.1      20.9      27.3      39.8      46.8
Net income                                   101.1      73.2     130.7     141.9     182.4     214.3
margin                                       9.8%      6.7%      9.5%      10.5%     12.2%     13.0%
EPS (Diluted)                                10.17      7.42     13.25     14.38     18.48     21.71
Source: Company data, Nirmal Bang Research
Initiating Coverage                                              Polaris Software Laboratories Ltd
 Balance Sheet (in Rs Crs.)
                                              2007    2008    2009    2010E    2011E     2012E
 Sources of Funds
 Share capital                                 49.3    49.3    49.3    49.3     49.3      49.3
 Reserves                                     552.3   608.2   723.3   833.2    983.5    1,165.7
 Share Holders Funds                          601.5   657.5   772.7   882.5   1,032.8   1,215.0
 Secured Loans                                  1.3     0.8     0.4     0.2      0.2       0.2
 Deferred Tax Liability                         0.5     6.9     6.7     6.7      6.7       6.7
 Total Liabilities and Equity                 603.3   665.2   779.7   889.4   1,039.7   1,221.8

 Application Of Funds
 Gross Fixed Assets                           413.1   466.7   528.4   615.4   675.4     740.4
 Less:Depreciation                            218.6   258.3   313.7   366.0   423.4     484.2
 Net Fixed Assets                             194.5   208.4   214.6   249.3   251.9     256.2
 Capital WIP                                   28.6     5.0     1.1     0.0     0.0       0.0
 Investments                                   41.2    18.7     9.6     9.6     9.6       9.6
 Goodwill                                       0.0     0.0    19.9    19.9    19.9      19.9
 Deferred Tax Assets                            0.2     7.9     9.7     9.7     9.7       9.7
 Curent Assets, Loans & Advances
 Cash                                          93.0   155.1   340.1   418.0    550.1     708.7
 Receivables                                  180.1   210.5   203.1   179.6    207.9     228.7
 Accrued Revenues                             143.5   151.3   142.2   168.4    179.6     197.6
 Loans and Advances                            75.1    93.2    90.3    93.5    104.0     109.8
 Total Current Assets                         491.7   610.0   775.7   859.5   1,041.6   1,244.8
 Current Liabilities & Provisions
 Creditors                                    103.9   134.9   160.3   159.3   178.9     195.5
 Provisions                                    45.8    44.7    46.6    53.8    66.4      72.8
 Others                                         3.3     5.1    44.0    45.5    47.7      50.0
 Total Curr.Liabs & Provisions                152.9   184.8   250.9   258.6   293.0     318.3

 Net Current Assets                           338.8   425.2   524.8   600.9   748.6     926.5

 Total Assets                                 603.3   665.2   779.7   889.4   1,039.7   1,221.8
 Source: Company data, Nirmal Bang Research
Initiating Coverage                                                    Polaris Software Laboratories Ltd
Cash Flow Statement (in Rs Crs.)
Cash Flow                                         2007        2008       2009    2010E    2011E    2012E
Profit Before Tax                               121.0         89.3      151.6    169.2    222.2    261.1
Plus Depreciation                                48.1         46.0      50.5     52.3     57.4     60.7
Deferred Tax                                       0.0         0.0       0.0      0.0      0.0      0.0
Interest & Dividend Income                        (3.1)       (4.4)     (11.2)   (15.7)   (19.2)   (25.2)
Interest Expenses
                                                  (0.0)
Net Income/Loss of fixed assets/doubtful debts/written offs    1.8      (3.7)     0.0      0.0      0.0
Dec/Inc in A/R                                   (45.3)       (27.3)    35.7     23.5     (28.3)   (20.8)
Dec/Inc in Loans and advances                    (69.4)       (20.0)     9.2     (29.4)   (21.7)   (23.8)
Increase (Decrease) in current liabilities and
provision                                        23.5         27.7      47.3       7.7    34.4     25.4
Others                                             1.9         (2.6)     (7.6)     0.0     0.0      0.0
Total Tax paid                                   (22.3)       (24.5)    (30.1)   (27.3)   (39.8)   (46.8)
Cash Flow from Operations (a)                    54.4         86.2      241.7    180.3    204.9    230.6
Capital expenditure                              (35.6)       (39.0)    (26.0)   (85.9)   (60.0)   (65.0)
Proceeds from Asset Sales & Other                  1.8          1.3       0.6      0.0     0.0      0.0
Chg in investments                                (4.0)         0.0     23.1       0.0     0.0      0.0
Chg in associates                                 (1.7)        (1.9)      0.0      0.0     0.0      0.0
Interest & Other Received                          3.1          4.4     11.2     15.7     19.2     25.2
Acquisition of subsidy                             0.0          0.0     (37.0)     0.0     0.0      0.0
Cash Flow from investing (b)                     (36.5)       (35.1)    (28.2)   (70.1)   (40.8)   (39.8)
Proceeds from exercise of stock options            0.1          0.0       0.0      0.0     0.0      0.0
Proceeds from premium on exercise of stock options 3.4          0.7       0.0      0.0     0.0      0.0
Proceeds / (Repayment) of secured loans           (2.1)        (0.5)     (0.5)    (0.2)    0.0      0.0
Lease finance charges                             (0.2)        (0.1)     (0.1)     0.0     0.0      0.0
Dividends paid (incl dividend tax)               (26.8)       (12.4)    (34.4)   (32.1)   (32.1)   (32.1)
Cash Flow from Financing                         (25.6)       (12.1)    (34.9)   (32.3)   (32.1)   (32.1)
Effect of exchange rates                          (0.8)        (1.1)      6.4      0.0     0.0      0.0

Net Cash Flow                                     (8.5)       37.8      185.0    77.9     132.1    158.7
Beginning Cash Balance                           101.5        117.2     155.0    340.1    418.0    550.1

Ending Cash Balance                               93.0        155.0     340.1    418.0    550.1    708.7
Source: Company data, Nirmal Bang Research
Initiating Coverage                                                 Polaris Software Laboratories Ltd
                                                      Ratios
       Profitability Ratios        FY 08            FY 09      FY 10 E   FY 11 E   FY 12 E
       Gross Margin                32.3%            35.7%       35.5%     35.8%     36.2%
       EBITDA                      10.8%            16.9%       16.9%     17.4%     18.0%
       PAT                         6.7%             9.5%        10.5%     12.2%     13.0%
       RoNW                        11.1%            16.9%       16.1%     17.7%     17.6%

       Growth Ratios
       Sales                        6.5%            25.3%      -2.2%     11.1%     10.0%
       EBITDA                      -26.7%           97.6%      -2.5%     14.3%     13.9%
       PAT                         -27.6%           78.5%      8.6%      28.5%     17.5%

       Valuation Ratios
       PE                          23.87            13.37      12.32      9.58      8.16
       P/BV                         2.66             2.26       1.98      1.69      1.44
       EV/EBIDTA                   13.52             6.03       5.84      4.60      3.51
       M.Cap/Sales                  1.59             1.27       1.30      1.17      1.06

       Per Share Data
       BV                          66.45            78.29      89.42     104.65    123.10
       EPS                         10.17             7.42      13.25     14.38     18.48
       Cash EPS                    17.56            35.43      43.32     56.70     72.78
       Source: Company data, Nirmal Bang Research
 Initiating Coverage                                                       Polaris Software Laboratories Ltd


                                                                  Note




                                                                Disclaimer
This Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates
contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is
meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the
contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or
omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang
Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or
its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this
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