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We reiterate our positive medium-term outlook on Polaris post the 1QFY12 results, which were
better than expected on margins. We find the risk-reward attractive as valuations are at a
substantial discount to its peer group despite above-average profitability and return ratios.
Maintain Buy with a TP of Rs232.
We reiterate our positive medium-term outlook – 23% EBITDA CAGR over FY11-13
We have broadly maintained our revenue forecasts for FY12/13 (March year-end), but upgraded
EBITDA forecasts by 5% each year (as cost control was better than our expectations in 1Q12).
However, these upgrades do not fully flow down to the PAT level (which sees just 1-2% rises)
due to our reduced non-operating income forecasts. We now forecast a 6.5% revenue CQGR and
155bp EBITDA margin expansion over the next three quarters driving valuations closer to the
mid-cap peer group average (see p5). Also, we now see a 23% EBITDA CAGR over FY11-13,
driven by continued healthy spending trends in large US-based financial services clients (up 9%
yoy in 1Q12) and non-linear growth in the product business (a 28% organic revenue CAGR over
FY11-13F), where deal sizes are increasing meaningfully.
1Q12 results showcased good margin management
Consolidated revenues grew 4.1% qoq to US$100.7m, in-line with our estimate. Product business
organic revenues were sluggish (-2.7% qoq), partly due to a base effect of US$2.4m of passthrough
revenues in 4Q. Services revenues were up 4.1%, driven by 3% volume growth and
1.8% realisation improvement, partly offset by the pass-through revenues. EBITDA margin of
12.9% (+82bp qoq) was a positive surprise (RBSe 11.5%). Adjusted for one-off costs and the
pass-through revenues, we estimate margin was down 96bp on salary hikes and margin dilution
from IdenTrust. Reported PAT was down 22.6% qoq to Rs446m on a spike in the tax rate to
27.5% (vs 12.3% in 4Q) and lower treasury income due to cash outflow on acquisitions, bonus
payouts and extension of customer credit.
Valuations continue to offer attractive risk-reward; maintain Buy with a TP of Rs232
At 8.5x FY12F EPS, Polaris trades at a 23% discount to the peer mid-cap stocks, while its FY10-
13F PAT CAGR of 18% compares favourably to the peer group median of 14%. A DCF check
yields a value of Rs230, significantly above the current share price and broadly in-line with our
P/E-based target price of Rs232.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We reiterate our positive medium-term outlook on Polaris post the 1QFY12 results, which were
better than expected on margins. We find the risk-reward attractive as valuations are at a
substantial discount to its peer group despite above-average profitability and return ratios.
Maintain Buy with a TP of Rs232.
We reiterate our positive medium-term outlook – 23% EBITDA CAGR over FY11-13
We have broadly maintained our revenue forecasts for FY12/13 (March year-end), but upgraded
EBITDA forecasts by 5% each year (as cost control was better than our expectations in 1Q12).
However, these upgrades do not fully flow down to the PAT level (which sees just 1-2% rises)
due to our reduced non-operating income forecasts. We now forecast a 6.5% revenue CQGR and
155bp EBITDA margin expansion over the next three quarters driving valuations closer to the
mid-cap peer group average (see p5). Also, we now see a 23% EBITDA CAGR over FY11-13,
driven by continued healthy spending trends in large US-based financial services clients (up 9%
yoy in 1Q12) and non-linear growth in the product business (a 28% organic revenue CAGR over
FY11-13F), where deal sizes are increasing meaningfully.
1Q12 results showcased good margin management
Consolidated revenues grew 4.1% qoq to US$100.7m, in-line with our estimate. Product business
organic revenues were sluggish (-2.7% qoq), partly due to a base effect of US$2.4m of passthrough
revenues in 4Q. Services revenues were up 4.1%, driven by 3% volume growth and
1.8% realisation improvement, partly offset by the pass-through revenues. EBITDA margin of
12.9% (+82bp qoq) was a positive surprise (RBSe 11.5%). Adjusted for one-off costs and the
pass-through revenues, we estimate margin was down 96bp on salary hikes and margin dilution
from IdenTrust. Reported PAT was down 22.6% qoq to Rs446m on a spike in the tax rate to
27.5% (vs 12.3% in 4Q) and lower treasury income due to cash outflow on acquisitions, bonus
payouts and extension of customer credit.
Valuations continue to offer attractive risk-reward; maintain Buy with a TP of Rs232
At 8.5x FY12F EPS, Polaris trades at a 23% discount to the peer mid-cap stocks, while its FY10-
13F PAT CAGR of 18% compares favourably to the peer group median of 14%. A DCF check
yields a value of Rs230, significantly above the current share price and broadly in-line with our
P/E-based target price of Rs232.
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