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Polaris: Feeble growth

May 6, 2002

Polaris’ performance for the fiscal FY02 has been disappointing. For the full year, the company’s topline grew by a marginal 3%. Declining operating margins, increased depreciation costs and higher taxes caused bottomline to decline marginally during the year.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 708 652 -7.9% 2,656 2,739 3.1%
Other Income 14 28 96.7% 42 100 141.5%
Expenditure 533 482 -9.6% 2,002 2,091 4.4%
Operating Profit (EBDIT) 175 170 -2.8% 653 648 -0.8%
Operating Profit Margin (%) 24.7% 26.1%   24.6% 23.7%  
Interest 0 0   0 -  
Depreciation 26 21 -19.2% 68 94 38.3%
Profit before Tax 163 177 8.6% 626 654 4.4%
Tax 10 17 68.1% 6 38 572.1%
Profit after Tax/(Loss) 153 160 4.7% 621 617 -0.7%
Net profit margin (%) 21.6% 24.6%   23.4% 22.5%  
Diluted number of shares 51.2 51.2   51.2 51.2  
Diluted Earnings per share* 12.0 12.5   12.1 12.0  
P/E (x)   18.9     19.7  

The sequential decline in revenues is likely due to the company witnessing a decline in volumes, As for 4QFY02, the company managed to hike onsite-billing rates by 8% and the share of revenues coming from onsite projects increased significantly from 34% in 3QFY02 to 48% in 4QFY02. Consequently, the contribution of offshore projects declined proportionately from 66% in 3QFY02 to 52% in 4QFY02.

A marginal decline in offshore billing rates contributed to the share of onsite revenues increasing. However, the primary reason for the fall in offshore revenues could be due to some offshore projects being completed. The sharp decline in the number of active clients from 93 in 3QFY02 to 76 in 4QFY02 supports the argument. Apparently, some accounts that lost were large since the revenues from top five clients fell steeply from 47% in 3QFY02 to 32% in 4QFY02.

The improvement in operating margins inspite the fact of the onsite offshore revenue break-up has shifted sharply in favour of onsite projects is due to employee costs declining by 15% in 4QFY02 compared to 3QFY02. The number of employees declined by 9% sequentially in 4QFY02.

Revenues from the US geography jumped by 31% sequentially in 4QFY02. However, there was a steep fall in the revenues from the India and Asia Pacific & Japan. The revenues from Europe did not show any growth in 4QFY02. This is quite contrary to the general trend seen in the sector most companies concentrated on Europe in wake of the slowdown and terrorist attacks on the United States.

While revenues from maintenance grew by 12% sequentially, revenues from product enhancement and new applications fell. Its service offering in the area of migration and re-engineering also witnessed growth. The company has not mentioned any details regarding the kind of revenues it earns from it banking product BankWare. Polaris expects a 300% growth in revenues from BankWare in FY03.

% Contribution to revenues 3QFY02 4QFY02 Change
Maintenance 21.5% 24.0% 11.6%
Product enhancement 11.0% 9.0% -18.2%
New applications 44.4% 37.0% -16.7%
Migration and Re-engineering 15.1% 21.0% 39.1%
ERP and others 8.0% 9.0% 12.5%

The revenues from the emerging verticals continued to decline, but the fall in revenues was relatively lower as compared to 3QFY02. Weakness was also evident in the banking, financial services and insurance verticals (BFSI) also. The revenues from BFSI segment heading south are a cause for concern as the company earns 72% of its revenues from this segment. Emerging verticals contributed 28% to Polaris’ revenues in 4QFY02.

Polaris is targeting a topline growth of 50% in FY03. Of this the company’s expects organic growth in the range of 17% to 25%. Considering the performance this fiscal the target seems quite steep.

At the current market price of Rs 237, the stock is trading at a P/E multiple of 20x its FY02 annualised earnings. While the next quarter is likely to be subdued for the company, an acquisition by the company could cause valuations to head north. However, the company’s relatively smaller size and hence, susceptibility to competition continues to be a cause for concern.

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