A healthy blend of services and high-margin products, and a strong deal pipeline are key positives for the stock.

Over the past couple of years, many mid-tier IT companies have focussed on targeting clients from the banking and financial services segment. This has stood them in good stead as many of these companies have seen growth led by the BFSI vertical.

In this light, Polaris Financial Technology, which delivers products and services that cater exclusively to the BFSI segment and counts top global financial institutions among its clients, is a good bet. Investors with a two-year perspective can buy the shares of the company.

At Rs 115, the share trades at less than five times its likely per share earnings for FY-13. At this valuation, the stock is at a discount to most mid-tier IT companies and also its historically traded levels.

A business mix with a healthy blend of services and high-margin products, a higher offshore component and strong deal pipeline are key positives for the stock.

The geographic mix too is well-spread-out for the company, which reduces concentration risks. While services growth is led by mature developed economies such as Americas and Europe, the products division is being driven by geographies such as India, West Asia and Asia.

Also, Polaris’ services business is fairly resilient to fluctuations in client spends as they are largely non-discretionary in nature. In FY-12, the company’s revenues grew 27.1 per cent to Rs 2049.4 crore, while net profits rose 9 per cent to Rs 220.7 crore.

The profit growth would have been higher, but for a 56.4 per cent increase in tax outflows, as the sunset clause for STPI scheme set in.

Healthy blend

Polaris derives more than three-fourth of its revenues from services and around 23 per cent from products. This mix makes for a healthy blend of high-margin products and relatively low-margin services.

The proportion of product revenues means that the operating margins of Polaris is 16-17 per cent higher than that of several mid-tier IT companies.

In a portfolio with significant product offerings, multiple revenue streams are opened up for the company in the form of maintenance and upgrade, apart from licence fees.

Despite entrenched players such as Infosys (Finacle), TCS (BaNCS) and Oracle Financial (FLEXCUBE) being in the market,

Polaris has managed to thrive and grow its product offering — Intellect at a faster pace than some of its competitors. The company continues to execute large projects such as the recent $55-million deal won from the RBI, where it is implementing core banking solutions.

A 15-year deal bagged recently from an European bank is another case in point. Recent results from TCS, HCL Technologies and Cognizant suggest that there is no undue strain in the BFSI segment.

Polaris’ client addition, especially of larger sizes, has been healthy over the past three-four quarters.

The number of active clients has risen from 246 in June last year to 267 currently. Three new customers have been added in the $10 million category over the past one year, taking the count to eight. These additions enhance the revenue visibility of the company.

Operating parameters shine

The company derives a healthy proportion of revenues from services rendered offshore. As much as 78 per cent of its efforts are delivered from offshore locations.

This proportion is among the best in the industry and significantly optimises costs for the company. The company’s services business comprises application development, and maintenance and testing.

These offerings are normal ‘run the business’ related services and are largely immune to fluctuations in client IT spends.

The utilisation factor is healthy at over 80 per cent, which is again among the best in comparison to peers.

Risks

Polaris’ days sales outstanding have increased steadily over the past year to 75 currently. The company attributes it to discounts not being offered in pricing.

This would prevent any erosion in realisations. Any adverse increase on this front would strain working-capital requirements.

(This article was published on August 11, 2012)
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