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Given Polaris's focus on the BFSI vertical, where stress points are emerging, we
lower our FY12/13F US$ revenues 4%/10% and EPS 4%/11%. Its currently trades
at FY13F book value, (it has troughed at these levels several occasions), an
attractive entry point, in our view. Polaris is our top mid-cap idea
Polaris, a BFSI-focused player, could see above-average impact from current crisis
The BFSI sector is again emerging as a hotspot in the ongoing financial crisis, with multiple
issues, such as slowing growth in developed economies, the sovereign debt crisis in Europe
entailing write-offs on bond assets, and a major potential lawsuit on mortgage assets.
Nevertheless, Polaris’s client profile has minimal representation in Continental Europe,
where only one client from that geography figures in its Top 10 list (even here, it primarily
works in the US for that client, according to management).
We reduce our FY12/13 revenue forecasts 4-10% and our EPS forecasts 4-11%
IT/Communication spending by large US financial institutions has held up well so far (up
8.9% yoy in Jun-11 qtr). In our recent checks, management highlighted that client activity
remains normal – projects are ramping up as scheduled and there are no delays or
cancellations. However, given a weak macro environment, we expect the client spending
pattern to be cautious in the near term. Deal flow in the product segment (23% of Polaris’s
revenues) could also be subdued, given reliance on discretionary budgets. Consequently, we
cut our FY12/13F US$ revenue 4%/10%. We expect Polaris to keep salary hikes in check in
FY13, restricting margin downside. This translates into 4%/11% cuts in our FY12/13F EPS.
Valuations are trading near historical troughs, presenting an attractive entry point
On our revised forecasts, the stock trades at one-year forward valuations of 6.5 PE and 1.1x
P/BV. It has troughed several times at this level on P/B; hence we believe valuations offer
downside support. We value the stock at the average for mid-cap peers on Bloomberg
consensus (for Mindtree KPIT Cummins and Infotech Enterprises) and our estimates (for
NIIT Tech and Hexaware). This implies 8.6x FY13F EPS, a 52% discount to our target
multiple for our sector benchmark, Infosys. We believe the stock’s correction has more than
factored in our revised base case. In the long term, we believe there is a case for the stock’s
re-rating to the higher end of the mid-cap peer group, given a growing contribution of the
products business to operating profit. Polaris is our top mid-cap Buy idea
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Given Polaris's focus on the BFSI vertical, where stress points are emerging, we
lower our FY12/13F US$ revenues 4%/10% and EPS 4%/11%. Its currently trades
at FY13F book value, (it has troughed at these levels several occasions), an
attractive entry point, in our view. Polaris is our top mid-cap idea
Polaris, a BFSI-focused player, could see above-average impact from current crisis
The BFSI sector is again emerging as a hotspot in the ongoing financial crisis, with multiple
issues, such as slowing growth in developed economies, the sovereign debt crisis in Europe
entailing write-offs on bond assets, and a major potential lawsuit on mortgage assets.
Nevertheless, Polaris’s client profile has minimal representation in Continental Europe,
where only one client from that geography figures in its Top 10 list (even here, it primarily
works in the US for that client, according to management).
We reduce our FY12/13 revenue forecasts 4-10% and our EPS forecasts 4-11%
IT/Communication spending by large US financial institutions has held up well so far (up
8.9% yoy in Jun-11 qtr). In our recent checks, management highlighted that client activity
remains normal – projects are ramping up as scheduled and there are no delays or
cancellations. However, given a weak macro environment, we expect the client spending
pattern to be cautious in the near term. Deal flow in the product segment (23% of Polaris’s
revenues) could also be subdued, given reliance on discretionary budgets. Consequently, we
cut our FY12/13F US$ revenue 4%/10%. We expect Polaris to keep salary hikes in check in
FY13, restricting margin downside. This translates into 4%/11% cuts in our FY12/13F EPS.
Valuations are trading near historical troughs, presenting an attractive entry point
On our revised forecasts, the stock trades at one-year forward valuations of 6.5 PE and 1.1x
P/BV. It has troughed several times at this level on P/B; hence we believe valuations offer
downside support. We value the stock at the average for mid-cap peers on Bloomberg
consensus (for Mindtree KPIT Cummins and Infotech Enterprises) and our estimates (for
NIIT Tech and Hexaware). This implies 8.6x FY13F EPS, a 52% discount to our target
multiple for our sector benchmark, Infosys. We believe the stock’s correction has more than
factored in our revised base case. In the long term, we believe there is a case for the stock’s
re-rating to the higher end of the mid-cap peer group, given a growing contribution of the
products business to operating profit. Polaris is our top mid-cap Buy idea
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