Polaris Financial Technology:: nirmal bang

Slow Quarter, Guidance reduced due to currency impact; however better disclosure practices introduced and compelling valuations
Polaris’ USD revenues grew by 2.2% QoQ but on a YoY basis revenues were down by 1.3% at $109.9mn. The product business grew by 12.5% QoQ on the back of strong license revenue booking however declined by 9.34% on a YoY basis. The services business declined 1.2% QoQ and were up just 1.2% YoY, suggesting lack of traction in services business. In Rupee terms, revenues grew 3% QoQ and 17.5% YoY to Rs 599 crore. Gross margins grew 163 bps QoQ to 38.7% Despite wage hike given in Q2FY13 to 50% staff, EBIDTA margins grew by 288bps to 16.93% through a mix of reduction in headcount which pushed up the utilization by 70bps, rise in license sales during the quarter and operational efficiency. Management has guided that margin performance can be maintained driven by strength in product license sales bookings and new deal wins. Forex loss during the quarter was at Rs.13 crore. In addition, other income at 7.8 crore loss consists of one times (AS-30 re-instatement loss of ~ 17.5 crore and some other gain of Rs.5.5 crore with interest income of Rs.4 crore). Adjusted PAT was up 18% QoQ at Rs.75.4 crore.

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FT Intellect business’ growth momentum continues
Intellect revenues grew 12.5% in dollar terms and by 15.4% in INR terms on a QoQ basis. License revenues contributed 19.5% against 13.3% in the previous quarter. Consequently, professional services, support & maintenance and SI contributed 47.1%, 30.3% and 3.1% respectively. During the quarter, Intellect won 9 new wins. Deal funnel stands at $444mn.
FT Services softened, management confident of good traction ahead
The services segment de-grew by 1.2% in dollar terms and grew by 1.8% in INR with addition of 4 new clients. Management expects good growth in this business going forward. Deal funnel stands at $312mn.
Guidance
Management lowered its FY13 US$ revenue guidance from over US$490 (14.5% YoY growth) in 1QFY13 to US$450 to 460mn (5.1 - 7.5% YoY), due to currency changes.
Valuation & Recommendations
Current quarter performance has been subdued in services as well as intellect revenues on a YoY basis. However, the stock is trading at 4.4x FY14E which is very compelling and limits the down side risk. In addition, the company is making an effort to disclose more transparent numbers which is very positive for the stock. We are rolling our target price to our FY14 projections; and assigning a 5.5 x target P/E for the stock to arrive at a target price of Rs.162.