For FY02, Polaris has given the topline guidance in the range of Rs 3 to 3.2 bn. However, it seems very unlikely that the company will manage to achieve this, considering the fact that the third and the fourth quarters of FY02 are expected to be tougher for the software industry compared to the first half.
This is due to the fact that the impact of the September 11th attacks will be felt now. Also, the BFSI (banking, financial services and insurance) vertical suffered the most and Polaris has got a significant exposure to (earned 68% of its revenues in 2QFY02) to this vertical.
Let us look what the numbers have to say. The company has earned Rs 1.4 bn already in 1HFY02 and therefore, it will need to earn in the range of Rs 1.6 bn to Rs 1.8 bn in the second half. The company on an average needs to earn Rs 797 m in both the quarters of 2HFY02 to reach Rs 1.6 bn. This translates to the fact that the company will have to register sequential growth rates of about 8.5% for both the quarters to achieve this figure. The growth needed for 2HFY02 over the 1HFY02 is 13%. In 2QFY02 a representative sample of 12 companies had clocked a growth of about 3.6% (QoQ), while Polaris cold manage only 0.7%.
Both these figures seem slightly steep for the company to manage. The software sector, in 1HFY01, as a whole is expected to grow by 4% over 1HFY02. Polaris will, therefore, have to far out pace the industry growth rates. However, the company stands firm on its guidance. According to the company, it has developed an advanced sales process matrix that allows it to accurately pinpoint sales opportunities. The company is presently looking at 75 addressable opportunities globally.
Polaris is looking at growth from opportunities arising out of outsourcing and expects that large contracts in the range of US$ 50 m to US$ 100 m to be divided amongst many companies. However, this might not be the case. Increasingly, as software majors from India establish their credibility abroad, clients may prefer to work with a single company instead of managing multiple vendors. Recently, Wipro got a contract worth US$ 75 m in Europe, an unprecedented event in the software industry.
The company’s stock price has run up from Rs 50 in September 2001 to Rs 150 currently. The stock is trading at a P/E multiple of 12 times its 2QFY02 annualised earrings. If the company cannot live up to its revenue guidance the stock might see some downside. However, till then it is likely to remain range bound in the near term.
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407