Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Polaris Software Lab (POL)
Technology
Margins disappoint; forex income saves the day. Polaris reported a 250 bps qoq
decline in EBITDA margin despite tailwinds from higher offshore leverage, higher
product revenue contribution and increase in utilization. Management attributed the
margin weakness to Re appreciation and wage pressure in the lateral as well as fresher
market. Even as Re could swing either way, the latter is a structural pressure point and
keeps us Cautious on the mid-caps in general. Retain SELL on Polaris.
3QFY11 results – in-line revenues, disappointing margins, in-line net income (forex-aided)
Polaris reported revenues of US$89 mn (+6.6% qoq, 1% ahead of estimate), EBITDA margin of
13.1% (down 250 bps qoq and 310 bps yoy, 140 bps below estimate) and net income of Rs502
mn (+4.6% qoq, 1% below estimate) for the Dec 2010 quarter. Growth was led by a strong
quarter for their product suite ‘Intellect’, which grew 16% sequentially. The company attributed
the weak margin performance to Re appreciation and wage pressure in the industry.
Margin weakness is structural; improvement a few quarters away
Polaris’ weak margin performance was particularly disappointing in the light of strong tailwinds in
the form of (1) strong product revenue growth – product business grew 12% qoq while revenues
for the services business were flat. Polaris has indicated 9-10% pts better margins for the products
business over services, (2) higher offshore leverage – offshore proportion of revenues increased
170 bps qoq to 56.2%, and (3) higher utilization – at 78% for 3QFY11 versus 76% in 2QFY11.
Polaris management attributed the weak margin performance to Re appreciation and wage
pressure in the industry. We note that both these are industry tailwinds and the Tier-I names have
reported flat to up qoq margins in a similar environment. This clearly reflects the wage pressure
challenges in front of the mid-sized companies in the current high-demand, supply-constrained
environment for the sector. Also, interestingly, Polaris management indicated 25-40% increase in
campus level salaries. This is contrasting to the commentary from Tier-I players who have been
indicating stable salaries at campuses. This possibly is a campus salary correction for specific
companies and may impact a few other mid-sized companies as well. Polaris management also
guided towards little scope to improve margins over the next 2-3 quarters.
Cut estimates and target price; reiterate SELL
We have reduced our FY2012/13E EPS estimate for Polaris by 8/6% to Rs19.5/21.5, respectively.
We note that the EPS downgrade is despite a 1.3% and 2.2% upgrade in our revenue estimate for
the company for FY2012E and FY2013E, respectively. We have cut our margin estimates
substantially and now forecast an EBITDA margin of 13.1% and 12.3% for FY2012E and FY2013E,
respectively. Reiterate SELL with a reduced target price of Rs175/share (9X FY2012E EPS).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Polaris Software Lab (POL)
Technology
Margins disappoint; forex income saves the day. Polaris reported a 250 bps qoq
decline in EBITDA margin despite tailwinds from higher offshore leverage, higher
product revenue contribution and increase in utilization. Management attributed the
margin weakness to Re appreciation and wage pressure in the lateral as well as fresher
market. Even as Re could swing either way, the latter is a structural pressure point and
keeps us Cautious on the mid-caps in general. Retain SELL on Polaris.
3QFY11 results – in-line revenues, disappointing margins, in-line net income (forex-aided)
Polaris reported revenues of US$89 mn (+6.6% qoq, 1% ahead of estimate), EBITDA margin of
13.1% (down 250 bps qoq and 310 bps yoy, 140 bps below estimate) and net income of Rs502
mn (+4.6% qoq, 1% below estimate) for the Dec 2010 quarter. Growth was led by a strong
quarter for their product suite ‘Intellect’, which grew 16% sequentially. The company attributed
the weak margin performance to Re appreciation and wage pressure in the industry.
Margin weakness is structural; improvement a few quarters away
Polaris’ weak margin performance was particularly disappointing in the light of strong tailwinds in
the form of (1) strong product revenue growth – product business grew 12% qoq while revenues
for the services business were flat. Polaris has indicated 9-10% pts better margins for the products
business over services, (2) higher offshore leverage – offshore proportion of revenues increased
170 bps qoq to 56.2%, and (3) higher utilization – at 78% for 3QFY11 versus 76% in 2QFY11.
Polaris management attributed the weak margin performance to Re appreciation and wage
pressure in the industry. We note that both these are industry tailwinds and the Tier-I names have
reported flat to up qoq margins in a similar environment. This clearly reflects the wage pressure
challenges in front of the mid-sized companies in the current high-demand, supply-constrained
environment for the sector. Also, interestingly, Polaris management indicated 25-40% increase in
campus level salaries. This is contrasting to the commentary from Tier-I players who have been
indicating stable salaries at campuses. This possibly is a campus salary correction for specific
companies and may impact a few other mid-sized companies as well. Polaris management also
guided towards little scope to improve margins over the next 2-3 quarters.
Cut estimates and target price; reiterate SELL
We have reduced our FY2012/13E EPS estimate for Polaris by 8/6% to Rs19.5/21.5, respectively.
We note that the EPS downgrade is despite a 1.3% and 2.2% upgrade in our revenue estimate for
the company for FY2012E and FY2013E, respectively. We have cut our margin estimates
substantially and now forecast an EBITDA margin of 13.1% and 12.3% for FY2012E and FY2013E,
respectively. Reiterate SELL with a reduced target price of Rs175/share (9X FY2012E EPS).
No comments:
Post a Comment