1QFY2012 Result Update - Polaris Software ::Broadly meets expectations-- Reliance Securities

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Broadly meets expectations
Key highlights of the result
 Top-line growth was moderate: Polaris' reported revenue grew 2.9% qoq to
Rs456cr (including foreign exchange gain). The revenues saw a muted growth of
1.3% in 1QFY2012, excluding revenues from IdenTrust which the company
acquired in April 2011. The revenues from the company's flagship product
Intellect declined marginally during the quarter to Rs99cr as compared to
Rs102cr in 4QFY2011. Total products revenues stood at Rs105cr.
 Improvement in EBITDA margin: EBITDA margin of the company improved 80bp
qoq, despite salary hikes which came in as a surprise. Management has
attributed the margin improvement to better pricing and higher revenues from
products business. Containing SG&A expenses boosted the EBITDA margin by
30bp during the quarter. On a yoy basis, EBITDA margin was down 150bp in
1QFY2012.
 Higher taxes hurt bottom-line: The decline in other income and higher taxes
impacted profit after taxes. Effective tax rate increased from 13.5% in 4QFY2011
to 27.5% in 1QFY2012 while other income declined as there was no
extraordinary income during this quarter like 4QFY2011. Consequently, PAT was
down 22.6% qoq to Rs45cr.
Outlook and Valuation
Polaris' top-line was lower than expected. However, the surprise in EBITDA margin
serves as a motivation going forward. We believe that the company would see robust
growth in FY2012 driven by both organic a2nd inorganic means. Intellect continues to
see strong traction and the company also won 11 clients for this product during the
quarter. With the RBI deal expected to start contribution soon, the products revenues
will grow rapidly. Management has marginally revised its FY2012 revenues guidance
from US$425-435mn to US$430-440mn. On the margin front, we expect the
company's EBITDA margin to decline only 20bp in FY2012 as the company has
managed its costs quite well in 1QFY2012 despite salary hikes. We expect revenues
to grow by 21% and 17% in FY2012 and FY2013 respectively.
At the CMP of Rs175, Polaris is trading at 8.5x and 7.2x FY2012E & FY2013E
consolidated EPS of Rs20.5 and Rs24.1 respectively. We recommend a BUY on the
stock with a target price of Rs217, indicating a potential upside of about 25% from
the current levels.
Risks to the view
 Unstable US economy and poor macroeconomic data could lead to a slowdown
in the region which might impact demand
 Volatility in foreign exchange rates could impact the margins of the company
adversely