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2Q12 US$ revenues grew 10.6% qoq, beating our forecast easily. Salary costs subdued margins
(-67bp qoq), driving operating profits in line with forecast. FY12 guidance raise on US$ topline by
2.3% and EPS by 3.2-5.0% implies good near-term prospects. Poor cash flow conversion is an
area of concern.
2Q12 revenues easily beat our easily forecast; operating profit in line
Polaris reported US$ revenues of $111.3m up 10.6% qoq versus RBS estimate of 7.6% qoq
growth.
Excluding pass through revenues of $4.4m in 2Q12 ($0.9m in 1Q12), revenues grew 7.2%
qoq.
EBITDA margin at 12.2% was down 67bp (RBS est. 12.7%). Excluding pass-through
revenues, which were broadly as expected, EBITDA margin was at 12.7%, down by 28bp
qoq.
Major margin headwinds during the quarter were higher pass-through revenue and salary
cost; as a result of which gross margin was down 218bp. On the other hand SG&A leverage
positively contributed by 151bp.
PAT largely in line, but working capital rise is an area of concern
Forex gain was higher at Rs133.8m vs. Rs56m in 1Q12 and RBS est. of Rs112m.
Other income of Rs89m was boosted by Rs40m of non-core property sales. Reported tax rate
at 25.9% was in line with our expectation 26% .
As a result, reported PAT at Rs539.4m was up 21% qoq at Rs539m, broadly in line with our
expectation of Rs535.6m.
Net working capital (ex-cash) was up 53% qoq. Excluding the dividend outgo, we estimate it
is up 27%. We see the rise in receivable days (7.6 days on TTM revenues) and the 20% rise
in loans and advances as key drivers.
As a result, net working capital rise of Rs1.06bn was more than EBITDA of Rs622m. We
estimate that net cash was down 8% yoy (excluding the IdenTrust acquisition and dividend
payout). This is contrary to its earlier track record of good cash flow conversion and working
capital management.
The company also disclosed an income tax demand of Rs422m pertaining to 2007-08, which
has currently not been provided for, as it believes it has a strong case.
Intellect revenue and business momentum remain strong
The products business, Intellect reported revenues of US$30.4m, a qoq growth of 29.1%.
Adjusted for pass-through items, revenues were still up a strong 14.8% qoq.
Contribution of Intellect to the top line was at 27.3%, the highest ever reported by the
company.
The company reported 12 wins for Intellect during the quarter. This includes a large deal of
Rs400m. Management noted significant deals in Global Transaction banking and insurance
suites.
IT services revenues were up 5.0% qoq to US$81m, in line with our forecast of 5.2% qoq
growth.
Guidance revision implies prospects for 2HFY12 remain bright
Polaris revised the FY12 guidance up by 2.3% to US$440m-450m, an increase of 2.3% qoq.
In INR terms, the guidance raise was of a similar magnitude, implying that the full year
exchange rate assumption of Rs45.78 has been maintained. This is significantly ahead of our
current forecast of US$425m.
The new guidance translates into qoq growth of 1.6-5.0% over the next two quarters, which
implies near-term visibility remains reasonably good.
EPS guidance was revised up by 5% to Rs22.65-Rs23.47. Based on 1Q12 disclosure, the
company is hedged at Rs47.93 for 2HFY12, which implies that a significant proportion of the
benefit of the rupee depreciation can be incrementally captured. The EPS guidance was also
ahead of our basic EPS forecast of Rs20.5.
Stock prices in worst case scenario on demand, in our view
Polaris stock is down 21% ytd, and currently trades at just 6x our FY13F EPS, which builds in
significant demand slowdown due to the weak macro environment and resultant impact on the
BFSI vertical.
We note that our FY13F revenues of US$472m implies a growth of just 4.9-7.3% over the
FY12 revenue guidance. Hence we see potential for upgrades.
We believe current valuations factor in a repeat of the 2008/09 downturn in the BFSI vertical,
and hence we do not see downside from current levels.
We also note that the CFO's resignation (personal reasons cited) has also been a factor for
the recent weakness in the stock.\
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2Q12 US$ revenues grew 10.6% qoq, beating our forecast easily. Salary costs subdued margins
(-67bp qoq), driving operating profits in line with forecast. FY12 guidance raise on US$ topline by
2.3% and EPS by 3.2-5.0% implies good near-term prospects. Poor cash flow conversion is an
area of concern.
2Q12 revenues easily beat our easily forecast; operating profit in line
Polaris reported US$ revenues of $111.3m up 10.6% qoq versus RBS estimate of 7.6% qoq
growth.
Excluding pass through revenues of $4.4m in 2Q12 ($0.9m in 1Q12), revenues grew 7.2%
qoq.
EBITDA margin at 12.2% was down 67bp (RBS est. 12.7%). Excluding pass-through
revenues, which were broadly as expected, EBITDA margin was at 12.7%, down by 28bp
qoq.
Major margin headwinds during the quarter were higher pass-through revenue and salary
cost; as a result of which gross margin was down 218bp. On the other hand SG&A leverage
positively contributed by 151bp.
PAT largely in line, but working capital rise is an area of concern
Forex gain was higher at Rs133.8m vs. Rs56m in 1Q12 and RBS est. of Rs112m.
Other income of Rs89m was boosted by Rs40m of non-core property sales. Reported tax rate
at 25.9% was in line with our expectation 26% .
As a result, reported PAT at Rs539.4m was up 21% qoq at Rs539m, broadly in line with our
expectation of Rs535.6m.
Net working capital (ex-cash) was up 53% qoq. Excluding the dividend outgo, we estimate it
is up 27%. We see the rise in receivable days (7.6 days on TTM revenues) and the 20% rise
in loans and advances as key drivers.
As a result, net working capital rise of Rs1.06bn was more than EBITDA of Rs622m. We
estimate that net cash was down 8% yoy (excluding the IdenTrust acquisition and dividend
payout). This is contrary to its earlier track record of good cash flow conversion and working
capital management.
The company also disclosed an income tax demand of Rs422m pertaining to 2007-08, which
has currently not been provided for, as it believes it has a strong case.
Intellect revenue and business momentum remain strong
The products business, Intellect reported revenues of US$30.4m, a qoq growth of 29.1%.
Adjusted for pass-through items, revenues were still up a strong 14.8% qoq.
Contribution of Intellect to the top line was at 27.3%, the highest ever reported by the
company.
The company reported 12 wins for Intellect during the quarter. This includes a large deal of
Rs400m. Management noted significant deals in Global Transaction banking and insurance
suites.
IT services revenues were up 5.0% qoq to US$81m, in line with our forecast of 5.2% qoq
growth.
Guidance revision implies prospects for 2HFY12 remain bright
Polaris revised the FY12 guidance up by 2.3% to US$440m-450m, an increase of 2.3% qoq.
In INR terms, the guidance raise was of a similar magnitude, implying that the full year
exchange rate assumption of Rs45.78 has been maintained. This is significantly ahead of our
current forecast of US$425m.
The new guidance translates into qoq growth of 1.6-5.0% over the next two quarters, which
implies near-term visibility remains reasonably good.
EPS guidance was revised up by 5% to Rs22.65-Rs23.47. Based on 1Q12 disclosure, the
company is hedged at Rs47.93 for 2HFY12, which implies that a significant proportion of the
benefit of the rupee depreciation can be incrementally captured. The EPS guidance was also
ahead of our basic EPS forecast of Rs20.5.
Stock prices in worst case scenario on demand, in our view
Polaris stock is down 21% ytd, and currently trades at just 6x our FY13F EPS, which builds in
significant demand slowdown due to the weak macro environment and resultant impact on the
BFSI vertical.
We note that our FY13F revenues of US$472m implies a growth of just 4.9-7.3% over the
FY12 revenue guidance. Hence we see potential for upgrades.
We believe current valuations factor in a repeat of the 2008/09 downturn in the BFSI vertical,
and hence we do not see downside from current levels.
We also note that the CFO's resignation (personal reasons cited) has also been a factor for
the recent weakness in the stock.\
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