Polaris Software Lab to gain on product demand

Polaris Software Lab, a mid-tier information technology (IT) solutions provider, is well placed to benefit from strong growth momentum in its products business and rising penetration in emerging markets.

Business: Polaris Software is one of the leading end-to-end IT solutions providers for the banking, financial services and insurance (BFSI) segment in India and abroad. The company offers software solutions for core banking, corporate banking, wealth and asset management, and insurance sectors.

The company that initially started off providing IT services now offers IT products and business process outsourcing (BPO) as well. The company’s IT services segment includes application management and development, performance engineering, domain and infrastructure-led services and enterprise application solutions based on Oracle, SAP, Info Baan, Siebel, data warehousing and business intelligence and enterprise content management. The company’s comprehensive service-oriented architecture (SOA) based product portfolio includes ‘intellect’ suite of products like intellect universal banking, intellect consumer finance, intellect wealth and intellect cards along with six other offerings.

The company derives close to 75% revenues from IT services segment, while the contribution of IT products and BPO segments has been 24% and 1%, respectively, in recent times. It derives close to 90% revenues from BFSI segment while 10% from emerging verticals like retail, human resources, telecom etc. The company has seven business solution centres or offshore delivery centres in India along with 23 international offices and four global near shore development centres.

Investment rationale: The company has a strong and diversified presence in BFSI segment across the globe. Its clients’ portfolio includes nine of the top 10 global banks and seven of the top 10 global insurance companies.

On geographical basis, the company derives close to 47% revenues from the US, while the contribution from Europe, Asia Pacific & India and Middle East stood at 25%, 17% and 12%, respectively. The company derives close to 54% of revenues from its top 10 customers, majority of which give repeat business.
Polaris has been witnessing strong demand for its Intellect suite of products with major deal wins from the Reserve Bank of India earlier this year for $55 million followed by order from Bangladesh’s largest bank - Sonali Bank, with which it has signed a MoU to set up a joint venture. The company has also received smaller orders from some of the financial institutions in Sri Lanka, Vietnam and Middle East.

The company currently has sales funnel of close to $600-700 million, which should result in decent order conversions in future.
The company is aggressively looking to tap emerging markets to grow its products segment where in the margins are much higher as compared to services segment margins. The increasing share of revenues from products would help to keep its operating margins stable despite rise in employee costs.

Given its strong balance sheet with cash on hand of close to Rs417 crore and low debt, Polaris is well positioned to fund its future growth plans through organic or inorganic route.

Concerns: The company’s high dependence on BFSI segment does pose a risk if there’s significant cut in IT spends by financial majors. Also the company may face industry specific risks associated with foreign exchange rate fluctuations and increase in employee costs and attrition.

Valuations: Led by strong order book in its product segment and recurring revenues in its services segment, the company’s revenues are expected to grow at a compounded annual growth rate of 17% over FY11-13E while the net profit is expected to rise at a CAGR of 8% during the same period. At current market price of Rs140.40, the stock trades at 6.80 times its expected earnings per share in fiscal 2012, and 5.92 times its expected fiscal 2013 earnings. Investors with medium-term perspective can keep a watch on the stock.

Disclaimer: The writer does not hold any shares in the company.