Accumulate Polaris Financial; target of Rs 135: PLilladher

Prabhudas Lilladher is bullish on Polaris Financial Technology and has recommended accumulate rating on the stock with a target of Rs 135 in its January 22, 2013 research report.
 
“Polaris Software Lab (Polaris) reported Q3FY13 results below PLe/Consensus expectation due to weaker licenses revenue sale, Identrust’s loss and investment in FT Cloud. The management cited improving deal pipeline over the last quarter. We retain our “Accumulate” rating, with a revise target price of Rs135 (from Rs165).”
 
“Polaris reported Q3FY13 below PLe/consensus expectation. The company reported revenue de-growth of 4.4% QoQ to Rs5,728.8m (PLe: Rs6,092.2m, Cons: Rs6,002m) and de-growth of 3.8% QoQ in USD terms to $105.8m (PLe: $111.6m). Operating margins eroded by 470bps to 16.4%, due to Identrust loss, weaker licenses revenu. PAT de-grew by 26.2% QoQ to Rs407m (PLe: Rs677m, Cons: Rs605m). The management has seen pick-up in the deal activity over the last quarter (signed a $25m deal in Q3FY13). The company has invested to address integrated large deals (Sourcing & Intellect) in the pipeline. Polaris hired Mr. Jitin Goyal (Head of S&M, ex Infosys, Citibank) and also making investments in terms of improving S&M capabilities. The management was hopeful of improving deal wins/size in CY13. The weaker margin in the quarter was due to incremental loss of ~Rs75m (vs regular ~Rs40mn/qtr loss) by Identrust. The management is looking to divest Identrust and already got LoI for the same.”
 
“The management has been advised by the management consultant company, BCG (Boston Consultancy Group), on business restructuring to unlock the shareholder’s value. The suggestion has been taken into consideration in the board meeting. However, the management didn’t disclose the recommendations. The challenges (both growth and margin) in the near term are likely to be the biggest overhang on the stock price. We revise our growth and margin estimates down for FY13 and FY14. We retain our “Accumulate” rating with a revise TP of Rs135, 6x FY14E earnings estimate,” says Prabhudas Lilladher research report.

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