Buy Polaris; target of Rs 246: Arihant capital markets

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Buy Polaris; target of Rs 246: Arihant capital markets

Arihant capital markets is bullish on Polaris Software Lab and has recommended buy rating on the stock with a target of Rs 246 in its October 28, 2011 research report.

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Arihant capital markets is bullish on Polaris Software Lab and has recommended buy rating on the stock with a target of Rs 246 in its October 28, 2011 research report.

"Polaris posted their Q2FY12 results which was inline with our expectation. In USD terms, total revenue grew by 10.6% QoQ to $111.3mn while in INR terms it grew by 13.2% to Rs.509.7cr. Their bottomline saw a robust growth of 21% QoQ to Rs.53.9cr. It is to be noted however that their bottom line was boosted by property sales of ~Rs.4cr."

"Polaris saw a healthy margin recovery of around ~71 bps at EBIDTA level in Q2FY12. The margin improvement came mainly on the back of strong volume growth of 7.4% and an increased proportion of high margin product business. The product business' margin was at ~22% while the services margin was at 12%. We believe a low attrition rate of only 14% also supported margins. DSO however inched up to 57 days as compared to 52 in Q1. Polaris' product suite Intellect is seeing strong traction in the market with product revenue growing by a whopping 32.4% QoQ to Rs.139.3cr thus increasing its proportion of total revenue to 27% from 23% in the previous quarter. During the quarter, there were 12 Intellect wins (11in the Q1FY12) which came across various banking and insurance verticals. The management is aiming to increase the proportion of Intellect revenue to 30% in a year's time which will not only help in sustaining margins, but will also help the company to build up a source of annuity revenue in the form of maintenance revenue. Revenue from the RBI's deal has also started to come in and expected to go up in the coming quarters."

"Polaris has been showing strong growth on a consistent basis. Its product revenue growth in the current quarter shows an increasing acceptability of its products suite and gives us further confidence that Polaris is all set to go to the next level. Though, the ouster of a top management official at such an important juncture is a matter of concern, but we hope that the new CFO will be able to live up to the high market expectation. Taking into account the stronger than expected traction that Polaris is witnessing we are raising our estimates for both FY12E and FY13E. We now expect Polaris to post an EPS of Rs.23.2 and Rs.26.1 per share vis-à-vis Rs.22.2 and Rs.24.0 expected earlier for FY12E and FY13E respectively. We therefore increase our DCF based target price to Rs 246 from Rs 242 per share earlier and retain our "BUY" call on the stock," says Arihant capital markets research report. 

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To read the full report click on the attachment