Polaris: Second rung performance

Polaris has posted a 0.7% sequential rise in revenues and a marginal dip of 0.9% in bottomline for 2QFY02. On a YoY basis, the company’s topline has grown by 12% and the bottomline has risen by 10%. There is a significant other income component, which fueled the net profit figure for the quarter. Excluding this, the company would have reported a 3% dip in net profits on a YoY basis.

However, on the positive side, the company has managed to improve operating margins by 80 basis points. This is due to the fact that Polaris has managed to control is employee costs which have shown a decline of 10% sequentially. This is inspite of net addition of 93 employees compared to 1QFY02.

(Rs m)	1QFY02	2QFY02	Change
Sales	701	705	0.7%
Other Income	13	19	47.8%
Expenditure	539	538	-0.4%
Operating Profit (EBDIT)	161	168	4.1%
Operating Profit Margin (%)	23.0%	23.8%
Interest	-	-
Depreciation	22	25	17.9%
Profit before Tax	153	162	5.8%
Extra-ordinary item	6	-
Tax	4	7	111.4%
Profit after Tax/(Loss)	156	154	-0.9%
Net profit margin (%)	22.2%	21.9%
Diluted number of shares	51.2	51.2
Diluted Earnings per share*	21.1	12.0
P/E (at current price)		5.9
*(annualised)

During the quarter, Polaris has added 7 new clients. This takes the total number of active clients to 87. The company also signed up two large banking relationships for its product BankWare. The contribution of offshore revenues increased to 59.6% of total revenues from 58.2% in 1QFY02.The remaining came from onsite revenues. The increased contribution of offshore revenues could be another reason due to which the operating margins have moved up.

The business areas that saw growth included product enhancement and migration & re-engineering. However, all other areas showed de-growth. Other companies have been ramping up business from the maintenance area. The fact that Polaris failed to do so is a cause for concern. As regards the growth in income from product enhancements, the revenues might have a high degree of variability.

For FY02, the company has given guidance in the range of Rs 3 to 3.2 bn for the topline. Considering the fact that the company has earned Rs 1.4 bn already in 1HFY02, it will need to earn in the range of Rs 1.6 bn to Rs 1.8 bn. To meet this target the company will have to achieve a minimum sequential growth of 13% in the next two quarters. This seems very unlikely considering the fact third and the fourth quarters are expected to be tougher for the software industry compared to the first half. Also, the vertical that was hardest hit by the September 11th attacks was the BFSI (banking, financial services and insurance) vertical. Polaris earned 68% of its revenues from this vertical.

However, the US contributed only 40% to its revenues, which is one of the lowest in the software industry. Polaris has managed to de-risk its geographic concentration significantly over a period of one year. In 2QFY01 the company earned 71% of its revenues from the US. Europe contributed 22% and the contribution of India was 16%. The Asia pacific regions contributed the rest.

The company’s client concentration figures are slightly higher than the industry averages. While the contribution to revenues from the top client is 15%, the top five clients accounted for 42%. The figure for Wipro is 30% and that for Infosys is 25% (for top 5 clients).

At the current market price of Rs 71, the stock is trading at a P/E multiple of 6 times its 2QFY02 annualised earnings. The stock price might see a down side due to the lackluster performance, considering the fact that the stock price had run up on hopes of a solid performance by the company.