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Polaris: Flat topline

Jan 24, 2002

Polaris Software’s performance for 3QFY02 is quite unimpressive. The company has posted a QoQ topline growth of 0.3%, while the net profits have dipped by 1%. On a YoY basis, the company’s revenues have declined by 3%. The fall in net profits has been steeper (9%) due to increase in depreciation and taxes. On a sequential basis, Polaris has managed to improve margins. This is due to the fact that it has controlled its costs tightly. This is a common trend that has been seen across the board for software companies. Only a few like Satyam have seen operating margins decline. These companies are able to manage costs tightly as the largest expense is employee costs. In an environment where job markets are weak, companies are lowering this expense by laying off people, decreasing salaries or introducing a variable component to the salaries linked to topline.

(Rs m) 2QFY02 3QFY02 Change
Sales 705 708 0.3%
Other Income 19 14 -23.6%
Expenditure 537 533 -0.8%
Operating Profit (EBDIT) 168 175 3.9%
Operating Profit Margin (%) 23.8% 24.7%  
Interest 0 0  
Depreciation 25 26 2.6%
Profit before Tax 162 163 0.9%
Tax 7 10 35.1%
Profit after Tax/(Loss) 154 153 -0.8%
Net profit margin (%) 21.9% 21.6%  
Diluted number of shares 51.2 51.2  
Diluted Earnings per share* 12.0 12.0 -0.8%
P/E (x)   15.9  

Polaris added 9 new clients during the quarter as compared to 7 in the preceding quarter. This takes the number of active clients to 93. The list of clients added during the quarter included AIG, CommerzBank and Thomsom Financial Corp. The Yemen Kuwait Bank chose the company’s retail banking product BankWare. This is a big positive for the company. If the product is implemented successfully the company can look forward to a sizeable growth from this revenue stream.

The revenues from the BFSI (banking, financial services and insurance) vertical increased by 4% sequentially. However, this was offset by a steep decline in revenues from the other verticals. Polaris is has a significant portion of its revenues coming in from the BFSI vertical. The numbers from other software companies’ indicate a weakness. Therefore, going forward Polaris might find it very difficult to post a topline growth.

Verticals 2QFY02 3QFY02 Change
BFSI 68.5% 71.3% 4.4%
Emerging verticals 31.5% 21.7% -30.9%

The revenue break up based on geography did not change significantly. The only notable movement in numbers was that revenues from India jumped by 10% sequentially. This could mean a pressure on operating margins, as the billing rates for domestic projects are sharply lower as compared to onsite projects. Other areas saw a marginal decline in revenues compared to 2QFY02.

The billing rates for onsite projects declined by 4%. For offshore projects there was a marginal decline. Only services in emerging technologies grew sequentially, while all others saw revenues falling. This is again an indication of the tough environment the software companies are facing.

Service offerings 2QFY02 3QFY02 Change
Maintenance 22.8% 21.5% -5.4%
Product enhancement 11.8% 11.0% -6.5%
New applications 37.8% 44.4% 17.9%
Migration and re-engineering 18.4% 15.1% -17.7%
ERP and others 9.2% 8.0% -12.7%

At the current market price of Rs 190, the stock is trading at a P/E multiple of 14x its 3QFY02 annualised earnings. The stock price is likely to see a decline in valuations on back of the unimpressive performance.

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