Polaris Financial Technology Missed expectation, Restructuring to unlock values:: Prabhudas Lilladher,

Polaris Software Lab (Polaris) reported Q3FY13 results below PLe/Consensus
expectation due to weaker licenses revenue sale, Identrust’s loss and investment in
FT Cloud. The management cited improving deal pipeline over the last quarter. We
retain our “Accumulate” rating, with a revise target price of Rs135 (from Rs165).

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! Q3FY13 results – missed expectations: Polaris reported Q3FY13 below
PLe/consensus expectation. The company reported revenue de-growth of 4.4%
QoQ to Rs5,728.8m (PLe: Rs6,092.2m, Cons: Rs6,002m) and de-growth of 3.8%
QoQ in USD terms to $105.8m (PLe: $111.6m). Operating margins eroded by
470bps to 16.4%, due to Identrust loss, weaker licenses revenu. PAT de-grew by
26.2% QoQ to Rs407m (PLe: Rs677m, Cons: Rs605m).
! Investment to address improving deal pipeline: The management has seen
pick-up in the deal activity over the last quarter (signed a $25m deal in Q3FY13).
The company has invested to address integrated large deals (Sourcing &
Intellect) in the pipeline. Polaris hired Mr. Jitin Goyal (Head of S&M, ex Infosys,
Citibank) and also making investments in terms of improving S&M capabilities.
The management was hopeful of improving deal wins/size in CY13.
! Identrust continues to add to woes: The weaker margin in the quarter was due
to incremental loss of ~Rs75m (vs regular ~Rs40mn/qtr loss) by Identrust. The
management is looking to divest Identrust and already got LoI for the same.
! Restructuring on cards to unlock the shareholders’ value: The management has
been advised by the management consultant company, BCG (Boston
Consultancy Group), on business restructuring to unlock the shareholder’s
value. The suggestion has been taken into consideration in the board meeting.
However, the management didn’t disclose the recommendations.
! Valuation and Recommendation: The challenges (both growth and margin) in
the near term are likely to be the biggest overhang on the stock price. We revise
our growth and margin estimates down for FY13 and FY14. We retain our
“Accumulate” rating with a revise TP of Rs135, 6x FY14E earnings estimate.