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Polaris's 4Q11 revenues (ex pass-through items) were in line, but normalized EBITDA margins
weaker at 13.2% (RBS est. 14.5%) due aggressive hiring of sales staff. Robust deal pipeline in
services and products and FY12E US$ revenue growth guidance of 22-25% lend support to our
positive bias. Reiterate Buy
4Q11 revenues and FY12E revenue growth guidance in line
Consolidated revenues were up 8.5% qoq to US$96.7m. Revenues (excluding pass-through
items) were up 4.9%, in line with our estimate. Product revenues grew 8.9% qoq (30.4% yoy),
while services revenues were up 8.7% qoq (up 4.0% qoq ex-pass through revenues).
Polaris guided for the FY12 US$ revenue growth of 22.0-24.9% (including revenues of
US$11m from recent acquisition of IdenTrust) with organic growth guidance of 18.9-21.7%.
The higher end of the organic growth guidance is in line with our current estimate.
In line with the 40% yoy growth of the products business in FY11, management expects to
grow the segment again by 40% in FY12 versus our current estimate of 35% growth.
However, Polaris sees a slower 16-17% organic growth in services (19.3% growth in FY11),
versus our current estimate of 20%.
Polaris ended FY11 with a robust pipeline worth US$610m, more than doubling from the start
of the year at US$300m. Within this, product pipeline grew from US$180m to US$400m,
reflecting renewed uptick in demand as well as higher acceptance of the Intellect suite in the
market place. The services pipeline grew from US$120m to US$200m.
Polaris expanded its sales and marketing capabilities with the addition of 40-50 senior
executives in 4Q11 to tap growing interest for the Intellect product suite and aid better deal
conversion.
The Intellect product suite registered 16 wins during 4Q11 (including 8 transformational deals
across verticals and geographies). This includes two US$10m+ Intellect deals during the
quarter, which gives credence to our thesis of strong demand for banking products and the
Polaris products gaining broader acceptance.
Notable wins within the product business include core banking solution win from the Reserve
Bank of India (RBI), won against competition from global Tier I product vendors. Polaris
claimed that TCV of the 10-year deal is one of the largest in the global banking products
market. We believe this is a landmark deal for Polaris, which strengthens its position to
compete for other large deals going forward. During 4Q11, Polaris also signed 3 large
services deals with top global banks in US.
4Q11 margin lower; FY12 EPS guidance of Rs21.5-22
Polaris's 4Q11 EBITDA margins were lower qoq by 106bp at 12% versus our expectation of
14.5%. This decline was attributed to 1) increase in S&M costs (impact of 1.6%) due to
addition of 40-50 senior employees to sales and marketing team and 2) one time expenses of
Rs30mn (impact of 0.7%) towards evacuation of employees from Japan and Middle East
during 4Q11; and c) the inclusion of pass-through revenues in the top line. Adjusted for the
one-time Japan/ME costs and pass-through revenues, EBITDA margin was up 6bp qoq to
13.2%.
Polaris expects FY12 EBITDA margins to remain flat. It expects that operating leverage in its
high-growth product business will compensate for margin headwinds through wage inflation
and currency. Polaris has guided for wage inflation of 12-13% for offshore employees and 2-
4% for onsite employees for FY12, which will impact margins on a sequential basis in 1Q12.
Despite weaker than expected EBITDA, 4Q11 PAT at Rs576mn was 4.8% higher than our
estimate, due to higher than expected other income (including non-recurring other income of
Rs97mn from sale of surplus property assets) and lower tax rates.
For FY12, Polaris guided for EPS of Rs21.5-22 (including further one-time other income from
additional sale of surplus property assets), as healthy EBITDA growth will be more than offset
by increase in tax rate from 15% in FY11 to 27% (versus our current estimate of 25.5%). This
compares with our current recurring EPS expectation of Rs21.4.
Retain Buy; near-term margins to be volatile, but operating leverage remains
Post 4Q11 results, we expect some marginal downward revision in our operating earnings on
the back of higher than expected tax rate guidance for FY12 as well as consolidating recently
acquired company IdenTrust which is expected to make loss of US$2mn in FY12 on a
revenue base of US$11mn.
Lower than expected operating margins for 4Q11 led to material correction in stock price post
4Q11 results. Considering lumpy product business that require upfront investment in sales
and marketing, we continue to expect qoq volatility in margins. We remain positively biased
towards Polaris from a medium-term perspective, considering increasing traction and high
operating leverage in its high margin product business and its strong Tier 2 IT services vendor
status with key clients in the high-growth BFSI vertical. We re-iterate Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Polaris's 4Q11 revenues (ex pass-through items) were in line, but normalized EBITDA margins
weaker at 13.2% (RBS est. 14.5%) due aggressive hiring of sales staff. Robust deal pipeline in
services and products and FY12E US$ revenue growth guidance of 22-25% lend support to our
positive bias. Reiterate Buy
4Q11 revenues and FY12E revenue growth guidance in line
Consolidated revenues were up 8.5% qoq to US$96.7m. Revenues (excluding pass-through
items) were up 4.9%, in line with our estimate. Product revenues grew 8.9% qoq (30.4% yoy),
while services revenues were up 8.7% qoq (up 4.0% qoq ex-pass through revenues).
Polaris guided for the FY12 US$ revenue growth of 22.0-24.9% (including revenues of
US$11m from recent acquisition of IdenTrust) with organic growth guidance of 18.9-21.7%.
The higher end of the organic growth guidance is in line with our current estimate.
In line with the 40% yoy growth of the products business in FY11, management expects to
grow the segment again by 40% in FY12 versus our current estimate of 35% growth.
However, Polaris sees a slower 16-17% organic growth in services (19.3% growth in FY11),
versus our current estimate of 20%.
Polaris ended FY11 with a robust pipeline worth US$610m, more than doubling from the start
of the year at US$300m. Within this, product pipeline grew from US$180m to US$400m,
reflecting renewed uptick in demand as well as higher acceptance of the Intellect suite in the
market place. The services pipeline grew from US$120m to US$200m.
Polaris expanded its sales and marketing capabilities with the addition of 40-50 senior
executives in 4Q11 to tap growing interest for the Intellect product suite and aid better deal
conversion.
The Intellect product suite registered 16 wins during 4Q11 (including 8 transformational deals
across verticals and geographies). This includes two US$10m+ Intellect deals during the
quarter, which gives credence to our thesis of strong demand for banking products and the
Polaris products gaining broader acceptance.
Notable wins within the product business include core banking solution win from the Reserve
Bank of India (RBI), won against competition from global Tier I product vendors. Polaris
claimed that TCV of the 10-year deal is one of the largest in the global banking products
market. We believe this is a landmark deal for Polaris, which strengthens its position to
compete for other large deals going forward. During 4Q11, Polaris also signed 3 large
services deals with top global banks in US.
4Q11 margin lower; FY12 EPS guidance of Rs21.5-22
Polaris's 4Q11 EBITDA margins were lower qoq by 106bp at 12% versus our expectation of
14.5%. This decline was attributed to 1) increase in S&M costs (impact of 1.6%) due to
addition of 40-50 senior employees to sales and marketing team and 2) one time expenses of
Rs30mn (impact of 0.7%) towards evacuation of employees from Japan and Middle East
during 4Q11; and c) the inclusion of pass-through revenues in the top line. Adjusted for the
one-time Japan/ME costs and pass-through revenues, EBITDA margin was up 6bp qoq to
13.2%.
Polaris expects FY12 EBITDA margins to remain flat. It expects that operating leverage in its
high-growth product business will compensate for margin headwinds through wage inflation
and currency. Polaris has guided for wage inflation of 12-13% for offshore employees and 2-
4% for onsite employees for FY12, which will impact margins on a sequential basis in 1Q12.
Despite weaker than expected EBITDA, 4Q11 PAT at Rs576mn was 4.8% higher than our
estimate, due to higher than expected other income (including non-recurring other income of
Rs97mn from sale of surplus property assets) and lower tax rates.
For FY12, Polaris guided for EPS of Rs21.5-22 (including further one-time other income from
additional sale of surplus property assets), as healthy EBITDA growth will be more than offset
by increase in tax rate from 15% in FY11 to 27% (versus our current estimate of 25.5%). This
compares with our current recurring EPS expectation of Rs21.4.
Retain Buy; near-term margins to be volatile, but operating leverage remains
Post 4Q11 results, we expect some marginal downward revision in our operating earnings on
the back of higher than expected tax rate guidance for FY12 as well as consolidating recently
acquired company IdenTrust which is expected to make loss of US$2mn in FY12 on a
revenue base of US$11mn.
Lower than expected operating margins for 4Q11 led to material correction in stock price post
4Q11 results. Considering lumpy product business that require upfront investment in sales
and marketing, we continue to expect qoq volatility in margins. We remain positively biased
towards Polaris from a medium-term perspective, considering increasing traction and high
operating leverage in its high margin product business and its strong Tier 2 IT services vendor
status with key clients in the high-growth BFSI vertical. We re-iterate Buy.
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