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Polaris: Sticky issues - Views on News from Equitymaster
 
 
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  • Dec 18, 2002

    Polaris: Sticky issues

    The domestic software services major, Polaris has been in the news again though for controversial reasons. The recent news has been that Polaris’ chairman and managing director (CMD) has been arrested in Indonesia. Mr. Arun Jain was arrested as a bank in Indonesia (Bank Artha Graha) filed fraud charges against him. Polaris had undertaken a contract worth US$ 1.3 m (Rs 637 m) from the Bank Artha Graha to implement a software solution covering central processing, disaster recovery and branch server related work. Due to some technicalities the contract was not completed and the bank terminated the contract prematurely. The CMD and a senior vice president of Polaris had been to Indonesia to resolve the issue by means of negotiations.

    This is not the only time Polaris has been in the thick of controversy. The company’s, merger with Orbitech (formerly a Citi group subsidiary) as reported by certain sections of the media was almost on the brink of a breakdown due to disagreements on the issue of valuations. Though the merger finally took place, the valuation matrix changed. Fortunately for Polaris shareholders, the merger ratio changed in their favour.

    Prior to the Orbitech acquisition, Polaris’ move to acquire a New Jersey based firm, DATA Inc., in 2000 ran into rough weather and had to be eventually abandoned. DATA Inc. provides software solutions for banking and financial sectors just like Polaris. Due to the abandonment of this deal DATA Inc. had filed a lawsuit against Polaris and Mr. Arun Jain for backtracking on the acquisition agreement. It claimed reimbursement of major expenses incurred following the acquisition promise of Polaris. It also claimed that it had revealed extensive confidential information to Polaris during the negotiations and this could seriously compromise its competitive position if the deal did not go through. However, Polaris denied the charge of breach of agreement and the matter is still being litigated.

    These two cases regarding the company indicate that the company had misread the potential of the mergers and jumped the gun prematurely. In the Orbitech case it managed to benefit but after its share of controversy. In case of DATA Inc. the issue is still being investigated. Though these are short-term concerns, it raises issues regarding management credibility and foresight.

    At Rs 175 the stock is currently trading at a P/E multiple of 19x its 1HFY03 estimated earnings. According to media reports, Bank Artha Graha is demanding a compensation of US$ 10 m (Rs 480 m). Polaris on a consolidated basis (excluding Orbitech) had posted a net profit figure of Rs 236 m for 1HFY03. Thus, if Polaris has to pay up, the whole net profit for FY03 could be wiped out.

    The stock has been battered due to this new negative development. In 1HFY03 the company has reported lacklustre performance on the topline basis. The bottomline has been even more disappointing. Based on the company’s performance so far in this current year that valuations look on the higher side and may witness weakness in the short term. In the long term a lot will depend on how the company is able to capitalize on its synergies with Orbitech. Considering the track record of the company, it would be prudent for retail investors to stay away from the counter.

     

     

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