Buy Polaris Tech; target Rs 246: Arihant capital markets

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Buy Polaris Tech; target Rs 246: Arihant capital markets

Arihant capital markets is bullish on Polaris Financial Technology and has recommended buy rating on the stock with a target price of Rs 246 in its January 23, 2012 research report.

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Arihant capital markets is bullish on Polaris Financial Technology and has recommended buy rating on the stock with a target price of Rs 246 in its January 23, 2012 research report.

"Polaris Financial Technology posted their Q3FY12 result which was broadly inline with our expectation. Their topline came in line at Rs.572.5cr (a QoQ growth of 12.3%) v/s our expectation of Rs.575cr. However, a higher operating income loss of Rs.20.2cr v/s our expectation of Rs.7cr brought down the total income to Rs.552.3cr (up by 5.6% QoQ) visà- vis our expectation of Rs.568cr. In US$ terms, total revenue grew by 1% QoQ to $112.5mn. The higher other income loss resulted in Polaris reporting a net profit of Rs.61.1cr which was slightly lower than our expectation of Rs.65cr."

"Polaris improved their gross margin by a whopping 390bps QoQ to 34.4%, mainly on the back of higher booking of license revenue during the quarter, which also resulted in Intellect's proportion in gross profit going up to more than 40%. The management however made it clear that this kind of margin will be hard to sustain going ahead as the current margin was mainly due to lumpiness in license revenue. In INR terms, its EBIDTA saw an improvement of ~10bps mainly due to the forex loss arising out of the sharp rupee depreciation which resulted in it taking losses in hedges as well as in repayment of a foreign loan ($10mn out of $30mn was paid back in Q3). However, we believe with the rupee showing signs of appreciation and increased proportion of Intellect revenue, margins should definitely see an uptick from here on. DSO saw a slight improvement to 56 days from 57 in the previous quarter."

"Polaris' product suite Intellect continues to see strong traction in the market. After the RBI deal, Intellect won another large deal of $20mn from a leading global bank which has presence in 32 countries. A total of 13 Intellect deal wins was done during the quarter (12 in Q2). The management also indicated that because of Intellect sale, they are also able to garner services revenue from the same set of clients. The management continues to remain confident on Intellect's funnel and believes that Intellect will see a strong growth of ~30% YoY in FY13E. This will help the company to increase its proportion of high margin product revenue going ahead. The current proportion of product revenue is at 27.5%. It will also help the company to build up a source of annuity revenue in the form of maintenance revenue."

"The Polaris management indicated that they are witnessing 'slowness' in decision-making. We believe that this was one of the reason why the management didn't went for another upgrade of their guidance and kept it constant at an EPS of Rs.22.65-23.47 per share. However, just like its peers they made it clear that no project cancellation has been witnessed. They are also seeing clients preferring a 'specialist' rather than a 'generalist' for their IT projects. The management believes that this will help the company in garnering more clients as well as an increased proportion of their client's IT budgets in the BFSI domain."

"The strong traction being seen in Intellect and services revenue around it gives us the confidence that the company is on track of making a niche for itself in the BFSI domain. The fact that its product suite Intellect has gone live in 3 out of the top 5 global banks giving Polaris ample points of reference for further sale of its product gives us the belief that Polaris will be able to grow its revenue at even faster rate going ahead. We thereby maintain target price of Rs.246 and retain our "BUY" call on the stock," says Arihant capital markets research report.

Quarterly Shifts by Morgan Stanley

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