Polaris Software aims to maintian margins at 15% this year

Polaris Software Labs reported net profit of Rs 50.13 cr for the December quarter against Rs 48.15 cr in the same quarter a year ago. Its revenues for the current quarter stood at Rs 399.9 cr versus Rs 388.84 cr, year-on-year (YoY).

Though salary and cost pressures will continue to affect margins side, a mix of product and service margins should ensure business margins are maintained says Arun Jain, Chairman and chief executive officer (CEO) of Polaris

''We want to maintain at around 15%. That is what our focus is. We want to increase license revenue to ensure that if something is not coming from services, then we need to increase our license revenue,'' he adds.

Below is the verbatium transcript of of Arun Jain's interview with Latha Venkatesh and Anuj Singhal on CNBC-TV18. Also watch the accompaning video.

Q: There is, quite a bit of buzz in the market about Citi selling its stake to a few FIIs. Have you had any discussion of the Citi on the same?

A: No, there was no discussion on this. There is no question on selling. Citi can sell on private stock. In last one year they sold 23% stock. There is nothing from open stock market perspective, but they are not selling as a strategic sale to anybody.

Q: Both in terms of the stake they earn from their own company and also OrbiTech none of this on the block?

A: No, they are selling almost 24% since last 15 months. But, that is to the stocks exchange, not in the strategic FII or anything in that nature.

Q: So what is the current stake of the Citi?

A: As declared in the last quarter, Citi holds 19% stake.

Q: Let us come to your numbers and your performance. Polaris, while you did see a better numbers in terms of revenues. There was that hit on the margins and over 2% points hit. How is this quarter shaping up? The current quarter shaping up, do you think you will be able to make up anything by way of margins?

A: The margins are definitely there; salary pressures and cost pressures are there on the margin side. But our products strategy which we launched 5 years back, is shaping well so our product business has shaped almost 23%. So, one quarter of our business now is product business, through which we are able to retain the margins by mixing the two things. Because product margins are 24%, service margins are something like 13%-14%, so, mixing the two, we are able to ensure that business margins are maintained for this year.

Q: What about attrition? Your attrition levels have gone up quite significantly and in fact are among the highest in the industry. Any concerns over there?

A: I think, last year was slightly where disturbance in captives happened and so suddenly there was a shortage in the supply side across all the IT industries. So, it is not very specific to Polaris. But overall, important point is retention at the management level, is more than 90% which is the most important part of this outsourcing business, that is my management team right, is my leadership team intact? My leadership is almost less than 3% in the attrition in the last three years. So that is our strength of the company, which is making me different in the market place.

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Q: Why I asked that is because your margins took quite a bit of hit, and large part of that was due to wage pressures. And even going forward, do you see that kind of wage pressure continuing? You had indicated that even for campus salaries you might have to take a 25-40% increase?

A: That is right. That is the reality of life, I think all the companies have to deal with it, and we are not different from that market place. So that is what we forecasted three - four years back, that over the period of time and as industry is maturing salary will go up. And the scope of companies to increase the pricing will not be the same but was available in 2005-06, because competition is intense over there. So we can increase our pricing by 2-3-4%, but salary raise of 10% need to be absorbed by more productivity, more efficiency, more frameworks and more products. And that is what we embarked on our journey, to ensure that we can give 30% improvement in the EPS over the last three years.

Q: So what do you think, you will stabilize at 15% or would it go even lower? What is the guidance and terms of margins for either the current quarter or for FY12 if you can give us an idea?

A: We want to maintain around 15%. Our focus is that, we increase license revenue to ensure that if something is not coming from services, then we need to increase our license revenue and that is, want to retain on 15% level. So, FY12 plan is not fully there, but that is what our objective is to create a plan where our sale and marketing investments are in line to ensure that 15% margins can be there.

Q: You have quite a bit of cash on your balance sheet. Any acquisition that you are planning right now?

A: We are looking for quite sometime, we are not able to find and spot the new one immediately after the Laser Soft and Indigo. We are discussing with two or three of them, but not yet come to any conclusion. So, as soon as it is there, I will let you know.

Q: When you were replying to Anuj, you said that city is selling whatever its stake on the exchanges, but not any strategic investor. Had they given you that comfort? Is that with that confidence you are saying this?

A: Yes, that confidence is there in the part of our agreement. And I have told multiple times  that any sales to a strategic investor has to need my approval and in this case there is no approval I have given the Citi to sell to any strategic investor, so, that question doesn