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
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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.
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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.
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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
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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.
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