Polaris Software, Strong 2QFY11 revenue growth; Retain OW::JPMorgan,

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Polaris Software Overweight
POLS.BO, POL IN
Strong 2QFY11 revenue growth supports margin
recovery; Retain OW





• Polaris reported 2Q FY11 results with 7% Q/Q revenue growth (6% in
US$ terms). EBITDA margin recovered by 220bp Q/Q, helped by volume
growth, currency movements and normalization of wage hikes. Absolute
EBITDA was up 26% Q/Q to Rs606m. Net profit was up 3% Q/Q due to
lower foreign exchange gains compared to 1QFY11.
• BFSI traction and product traction continue to be strong: Polaris
reported 17 intellect wins during the quarter, as improving macro
environment has translated into increased number of deal wins/closures with
the pipeline remaining strong. As a result, the traction in product segment
continued (product revenues contributed to ~23% of revenues, same as
1QFY11). We still believe that BFSI ramp-up is an industry trend, even as
M&A integration projects are being supplemented by additional
discretionary work to improve customer experience through areas like
analytics and mobility.
• FY11 EPS guidance maintained: Polaris management has maintained its
EPS guidance of Rs20.2-Rs20.6 (growth of 31-33% Y/Y) for FY11, despite
the sharp rupee appreciation over the last month. However, management did
indicate that sustained rupee appreciation could pose a challenge to margin
maintenance. We note that Polaris is reasonably protected by its hedge
positions of US$50m at an average rate of Rs48.33/$ for the rest of FY11
and US$74m at an average rate of Rs48.31/$ for FY12.
• Estimate changes: We are keeping our FY11/12 estimates largely
unchanged as the strong revenue traction is likely to be offset by the sharp
rupee appreciation in the recent weeks. We estimate FY10-12 revenue
CAGR of 15% and EPS CAGR of 21%.
• We remain OW and keep our Mar-11 PT at Rs235, which is based on a 10x
forward P/E, a 15-20% discount to other mid-caps in the sector due to its
high sector focus. Polaris remains one of the best leveraged stocks in Indian
IT to the financial sector IT spending recovery, in our view. Risks to our
view and PT include high client concentration, deterioration in the global
financial services sector, and sustained rupee appreciation.