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Polaris Software Lab (POL)
Technology
Margin remains a concern. Polaris reported a quarter of strong revenue growth led by
pass-through revenues from its products business. Upward revision in FY2012E revenue
guidance and good traction in the products space are positives, but the underlying
structural deficiencies keep us cautious on the stock. We raise our FY2012E/2013E EPS
estimates to Rs20.3/20.8, driven by revised currency and US$ revenue growth
assumptions, and target price to Rs145 (from Rs130 earlier). Retain REDUCE.
Another quarter of good revenue performance and margin disappointment
The key highlights of Polaris’ 2QFY12 were its surprisingly strong 10.6% sequential US$ revenue
growth to US$111.3 mn (6.2% above our estimates) and an equally disappointing miss at the
EBITDA level, which came in 6.3% below our estimate. Revenue growth was led by substantial
system integration component in one of the company’s recently won products deals (presumably
the RBI one). The company has raised its FY2012E US$ revenue growth guidance to US$440-450
mn and EPS guidance to Rs22.7-23.5. We note that FY2012E EPS guidance builds in substantial
forex gains and gains from real estate asset sale.
Margin weakness – a structural issue
Polaris’ EBITDA margin contracted 70 bps to12.2% from 12.9% in 1QFY12. This decline came as a
disappointment in a quarter with multiple margin aids in the form of Rupee depreciation,
completion of wage hike cycles, increase in the extent of offshoring and good traction from the
high margin products business. More telling is the fact that the 5.7% US$ revenue growth CQGR
in the nine quarters post June 2009 has resulted in a mere 1.3% Re EBITDA CQGR. This
substantiates our belief that Polaris’ margin challenges are structural – services business has very
few operational margin levers, while small deal sizes and increasing SI component continue to
dampen products business margins. We see few levers to improve (ex-currency) margins, with
utilization still high at 80% and limited headroom on the SG&A and offshoring front.
Raise EPS estimates; retain REDUCE
While the company has revised its EPS guidance upwards, we note that it includes a substantial
kicker from asset monetization. Inherent volatility in the products business, macro concerns and
low confidence on margin trajectory keep us negative on the stock. However, driven by our revised
currency and US$ revenue growth assumptions, we raise our EPS estimates for FY2012E/13E to
Rs20.3/20.8, respectively. We value the stock at 7X FY2013E earnings multiple to arrive at a target
price of Rs145 (increased from Rs130 earlier); retain REDUCE. Rupee staying at depreciated levels
poses upside risk to our estimates and might provide short-term upside to the stock as well.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Polaris Software Lab (POL)
Technology
Margin remains a concern. Polaris reported a quarter of strong revenue growth led by
pass-through revenues from its products business. Upward revision in FY2012E revenue
guidance and good traction in the products space are positives, but the underlying
structural deficiencies keep us cautious on the stock. We raise our FY2012E/2013E EPS
estimates to Rs20.3/20.8, driven by revised currency and US$ revenue growth
assumptions, and target price to Rs145 (from Rs130 earlier). Retain REDUCE.
Another quarter of good revenue performance and margin disappointment
The key highlights of Polaris’ 2QFY12 were its surprisingly strong 10.6% sequential US$ revenue
growth to US$111.3 mn (6.2% above our estimates) and an equally disappointing miss at the
EBITDA level, which came in 6.3% below our estimate. Revenue growth was led by substantial
system integration component in one of the company’s recently won products deals (presumably
the RBI one). The company has raised its FY2012E US$ revenue growth guidance to US$440-450
mn and EPS guidance to Rs22.7-23.5. We note that FY2012E EPS guidance builds in substantial
forex gains and gains from real estate asset sale.
Margin weakness – a structural issue
Polaris’ EBITDA margin contracted 70 bps to12.2% from 12.9% in 1QFY12. This decline came as a
disappointment in a quarter with multiple margin aids in the form of Rupee depreciation,
completion of wage hike cycles, increase in the extent of offshoring and good traction from the
high margin products business. More telling is the fact that the 5.7% US$ revenue growth CQGR
in the nine quarters post June 2009 has resulted in a mere 1.3% Re EBITDA CQGR. This
substantiates our belief that Polaris’ margin challenges are structural – services business has very
few operational margin levers, while small deal sizes and increasing SI component continue to
dampen products business margins. We see few levers to improve (ex-currency) margins, with
utilization still high at 80% and limited headroom on the SG&A and offshoring front.
Raise EPS estimates; retain REDUCE
While the company has revised its EPS guidance upwards, we note that it includes a substantial
kicker from asset monetization. Inherent volatility in the products business, macro concerns and
low confidence on margin trajectory keep us negative on the stock. However, driven by our revised
currency and US$ revenue growth assumptions, we raise our EPS estimates for FY2012E/13E to
Rs20.3/20.8, respectively. We value the stock at 7X FY2013E earnings multiple to arrive at a target
price of Rs145 (increased from Rs130 earlier); retain REDUCE. Rupee staying at depreciated levels
poses upside risk to our estimates and might provide short-term upside to the stock as well.
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