BUY Polaris Financial Technology :Centrum

Polaris Financial Technology Limited (Polaris) a leading global player in Specialty Application Development for the BFSI sector. Over the years, the company has strengthened its product and services profile with the help of global acquisitions - it acquired US-based digital identity authentication services provider, IdenTrust Inc., in line with its vision of achieving market leadership in Financial Technology (FT). This helped to augment its FT Grid strategy for global markets and prepare for the next growth trajectory. Earlier in 2008, it acquired US-based insurance product and services player SEEC Inc and in 2010 it acquired ‘Laser Soft’ a Chennai based banking software products company.
Polaris has a strong base of more than 200 customers with 80 of them as strategic accounts. Its customers include 10 out of the top 15 global banks and 6 of the 10 top global insurance companies. It gets around 58% of revenues from its top 10 clients with Citigroup forming a bulk of it, with whom it has been dealing since last 15 years. Polaris has diversified geographical presence with US/North America contributing 55% to the revenues in FY2011 while Europe, Asia Pacific and India & Middle East contributing 25%, 8% and 12%, respectively to FY2011 consolidated revenues.
With recent acquisition of Patni by iGate, we believe there can be further consolidation in the mid and small sized IT companies and the average PE multiple of companies like Polaris, which are witnessing strong operating performance, should witness a vertical shift. Further there are reports of large vendors in the western world breaking up orders of over US$ 10 billion into smaller ones and placing them with mid sized IT companies in order to save on project costs. We believe that this trend is likely to continue and would be positive for Polaris.
Polaris’ management has given a guidance of 17-20% YoY revenue growth to reach around Rs.2,400 crore for FY2013. Considering net profit margin of 10%, Polaris can deliver EPS of Rs.24.20 for FY2013E. The company has been gearing up to double its revenue in next 4 years. Moreover, with changes in the global banking norms with regard to capital adequacy ratio where major banks are shifting to transaction banking and risk management, Polaris is well positioned to take advantage with its global transaction banking platform and risks offerings via service oriented architecture.
The company had cash on books of Rs.402 crore as on March 31, 2012. The net cash (after deducting debt on books) is Rs.279 crore or Rs.28 per share is 24% of the current market cap of the company. Polaris has been improving its dividend payout and had paid Rs.4.50 in FY2011. In FY2012, the company has already announced Rs.2.0 as interim dividend (up from last year’s interim dividend of Rs.1.75) and is expected to announce the final dividend in later half of July.
Polaris has corrected by 34% from its yearly high price of Rs.175 and is currently trading near its monthly low of Rs.112. At the current price of Rs.116, the stock is available at an attractive valuation of 5.2x FY2012 EPS of Rs22.2 and 4.8x its FY2013E EPS of Rs24.2.
We believe that there will be a shift in valuations of mid and small sized IT companies due to consolidation activity and the average PE multiple of mid sized IT companies like Polaris, which are witnessing strong operating performance, should witness a vertical shift. Hence, we recommend investors to accumulate Polaris for a target of Rs.145 valuing the company at 6.0x its FY12013 earnings giving an upside of 27% from current levels

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