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Polaris Software Lab (POL)
Technology
Good headline numbers – but the devil is in the details. SELL. Even as Polaris’
revenue performance for 4QFY11 (+8.5% qoq) was impressive, margin performance
disappointed yet again – margins were down 110 bps qoq despite strong revenue
growth tailwinds. Recurring EPS growth in FY2012E has multiple challenges – margin
pressure, high forex-gain base, and ETR jump. It is instructive to note Polaris’ revenue,
net income, and EBITDA growth in FY2011 – 22%, 32%, and (-) 4%, respectively. We
reduce our FY2012/13E estimates by 2-3%; maintain TP (Rs175) and SELL rating.
4QFY11 results – revenues ahead, margins disappoint. Asset sale drives higher headline PAT
Polaris reported revenues of US$96.7 mn (+8.5% qoq, 4.6% ahead of estimate), EBITDA margin
of 12% (down 110 bps qoq and 460 bps yoy, 90 bps below estimate), and net income of Rs576
mn (+15% qoq, 23% above estimate) for the March 2011 quarter. We note that the net income
outperformance was aided to the tune of Rs97 mn on account of surplus real estate sale. Adjusted
net income of Rs479 mn was 2% ahead of estimate. More importantly, despite the handsome
revenue beat, EBITDA came in 2.6% lower than our estimate – EBITDA declined 9.4% yoy.
Margin weakness is structural
Even as Polaris management attributed some part of margin decline to the impact of Japan and
Middle East crisis (a 70 bps qoq margin impact), margins declined 40 bps even on an adjusted
basis – this in a quarter where the company saw a jump in utilization, had strong growth in the
products business, gained from currency movements, and had no apparent margin headwind. In
fact, it is interesting to note that Polaris’ EBITDA has now fallen for two years in a row (FY2011 yoy
EBITDA decline of 4% follows a 5% decline in FY2010) – the company has reported a net income
growth of 16% and 32% for FY2010 and FY2011, despite the EBITDA decline.
Essentially, we wish to draw attention to the contribution of several non-recurring below-EBITDA
line items to the strong headline EPS growth reported by the company. Rs567 mn swing in other
income (led by strong forex gains) and Rs97 mn asset sale bookings contributed nearly all the net
income growth in FY2011. Now, even as forex gains could continue through FY2013E as the
company is well-hedged, and the company has indicated more asset sale gains in FY2012E,
ascribing a PE multiple to these non-recurring line items would be a mistake, in our view.
Cut EPS estimates, reiterate SELL
We have reduced our FY2012/13E EPS (ex-asset sale) estimate by 3.3/2.4% to Rs18.9 and Rs20.9,
respectively. The 3-4% increase in our revenue estimates builds in the recent IdenTrust acquisition.
EPS cut is driven by lower margin assumptions and higher ETR assumptions. Reiterate SELL. TP
stays at Rs175.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Polaris Software Lab (POL)
Technology
Good headline numbers – but the devil is in the details. SELL. Even as Polaris’
revenue performance for 4QFY11 (+8.5% qoq) was impressive, margin performance
disappointed yet again – margins were down 110 bps qoq despite strong revenue
growth tailwinds. Recurring EPS growth in FY2012E has multiple challenges – margin
pressure, high forex-gain base, and ETR jump. It is instructive to note Polaris’ revenue,
net income, and EBITDA growth in FY2011 – 22%, 32%, and (-) 4%, respectively. We
reduce our FY2012/13E estimates by 2-3%; maintain TP (Rs175) and SELL rating.
4QFY11 results – revenues ahead, margins disappoint. Asset sale drives higher headline PAT
Polaris reported revenues of US$96.7 mn (+8.5% qoq, 4.6% ahead of estimate), EBITDA margin
of 12% (down 110 bps qoq and 460 bps yoy, 90 bps below estimate), and net income of Rs576
mn (+15% qoq, 23% above estimate) for the March 2011 quarter. We note that the net income
outperformance was aided to the tune of Rs97 mn on account of surplus real estate sale. Adjusted
net income of Rs479 mn was 2% ahead of estimate. More importantly, despite the handsome
revenue beat, EBITDA came in 2.6% lower than our estimate – EBITDA declined 9.4% yoy.
Margin weakness is structural
Even as Polaris management attributed some part of margin decline to the impact of Japan and
Middle East crisis (a 70 bps qoq margin impact), margins declined 40 bps even on an adjusted
basis – this in a quarter where the company saw a jump in utilization, had strong growth in the
products business, gained from currency movements, and had no apparent margin headwind. In
fact, it is interesting to note that Polaris’ EBITDA has now fallen for two years in a row (FY2011 yoy
EBITDA decline of 4% follows a 5% decline in FY2010) – the company has reported a net income
growth of 16% and 32% for FY2010 and FY2011, despite the EBITDA decline.
Essentially, we wish to draw attention to the contribution of several non-recurring below-EBITDA
line items to the strong headline EPS growth reported by the company. Rs567 mn swing in other
income (led by strong forex gains) and Rs97 mn asset sale bookings contributed nearly all the net
income growth in FY2011. Now, even as forex gains could continue through FY2013E as the
company is well-hedged, and the company has indicated more asset sale gains in FY2012E,
ascribing a PE multiple to these non-recurring line items would be a mistake, in our view.
Cut EPS estimates, reiterate SELL
We have reduced our FY2012/13E EPS (ex-asset sale) estimate by 3.3/2.4% to Rs18.9 and Rs20.9,
respectively. The 3-4% increase in our revenue estimates builds in the recent IdenTrust acquisition.
EPS cut is driven by lower margin assumptions and higher ETR assumptions. Reiterate SELL. TP
stays at Rs175.
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