Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Polaris: Summer wedding - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 23, 2002

    Polaris: Summer wedding

    The long wait seems to be over. Polaris’ move to merge with OrbiTech Solutions is perhaps the first sizable merger in the IT space post the technology meltdown. The reason for the merger is very simple, the combined entity will have sales of around Rs 6 bn (US$ 125 m). This makes it the sixth largest software company in the country.

    The advantage of size is that corporates aboard while awarding large contracts prefer to work with the top ten companies from the Indian industry. Large contracts are executed over a period of time and the business continuity of the vendor is a must. Therefore, bigger and better known names are the obvious choice.

    Also, the Polaris will add to its portfolio the service offerings provided by OrbiTech. Since, OrbiTech is a Citigroup company, its IT skills are likely to be in the banking, financial services and insurance (BFSI) domain. According to I-flex’s offer document, ‘OrbiTech Solution’s principle business is software development, software consultancy and turnkey projects in the financial services domain’. ObriTech brings with it IPRs (intellectual property rights) like OrbiPack framework, which has the capability to process over 10 m customer transactions.

    Polaris, on other hand, has traditionally focused on the banking segment and has a product known as BankWare. The merger is expected to create a set of complementary skills that can address the BFSI segment. This segment is one of the major revenue earners for the Indian software industry. Majority of software companies earn a significant portion of their revenues from this domain. The list includes Infosys (37% of revenues), Satyam (39% of revenues) and Polaris (72% of revenues).

    The concerns with the merger are that the combined entity will have more than 60% of its revenues coming from Citigroup. However, Citigroup is a very large group and the revenues come from 8 to 10 different business divisions. The client concentration, therefore, may not be as risky as it seems at the first glance. The company too plans to address this concern. It is re-organising into three strategic business units (SBUs) Products, Citigroup and Non-Citigroup.

    In terms of valuations, Polaris seems to have got a very good deal. For 25 share of OrbiTech, 14 fresh shares of Polaris will be issued. Considering the 100 day moving average, the price of Polaris’ share is Rs 210. Therefore, the price of one share of OrbiTech works out to be Rs 118. While the exact number of shares for OrbiTech is not known, the merged entity will have 110 m shares. As on 31st March 2002, Polaris had 51 m shares outstanding. This means a fresh issue of about 58 m shares. Considering the merger ratio this effectively translates to 105 m share for OrbiTech pre-merger.

    (Rs m) Polaris Group OrbiTech Combined
    Revenues 2,938 3,234 6,172
    Net profits 589 1,078 1,667
    Net profit margin 20.0% 33.3% 27.0%
    No of employees 2,544 1,256 3,800
    Revenue per employee (Rs) 1,154,874 2,574,841 1,624,211
    Profit per employee (Rs) 231,368 858,280 438,579
    No of shares (m) 51.2 105.0 110.0
    EPS (Rs) 11.5 10.3 15.2
    Share price (Rs) 210.0 117.6 303.0
    P/E (x) 18.3 11.5 20.0
    Market Capitalisation (x) 10,752.0 12,348.0 33,332.0
    Market Capitalisation/Sales 3.7 3.8 5.4

    Share price of Polaris based on 100 day moving average
    Share price of the combined entity based on assuming a P/E multiple of 20x

    On net profits of Rs 1,078 m and 105 m shares, the EPS for OrbiTech works out to be Rs 10. This implies that ObriTech has been approximately valued at a P/E multiple of 12x for the merger. This a very good buy for Polaris considering the fact that ObritTech has higher revenues, and much better productivity figures. The number of employees for ObriTech has been calculated by taking in to account the fact that merged entity will have more than 3,800 employees and Polaris Group had 2,544 employees as on March 31st 2002.

    While we have assumed a P/E multiple of the combined entity to be 20x, the valuations could move to higher. The company has announced plans to foray into the BPO space. This is likely to fuel significant interest. Retail investors should keep an eye on the valuation (P/E multiple) at which they are buying the stock. Considering the fact that Nasscom and top rung software companies expect 20% growth in FY03, it would be safe to work with valuation that factors in a similar growth rate.



    Equitymaster requests your view! Post a comment on "Polaris: Summer wedding". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    HCL Tech: Ends FY17 on Expected Lines (Quarterly Results Update - Detailed)

    Jun 29, 2017

    Volvo partnership caps a good year for HCL Technologies.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 12:43 PM


    • Track your investment in POLARIS CONSULTING with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks



    Compare Company With Charts