Multi Baggers

Polaris Financial Technology

Company overview:

Polaris Financial Technology Ltd provides financial technology products, modernizing services and consulting to the clients in core banking, corporate banking, wealth management and insurance business. According to the company's website Polaris is the chosen partner for 9 of the top 10 global banks and 7 of the 10 top global insurance companies. Polaris launched its core product portfolio "IntellectTM" in 2003.

Headquartered in Chennai, the company was incorporated in 1993 and was named Polaris Software Labs Ltd. Later it changed its name to Polaris Technology Financial Ltd in 2011. Citi group partnered with Polaris when Citi first entered into the Indian market and at the same time Citi also set up its own company called Citibank Overseas Software Ltd (COSL) which was later named as Orbitech before it was merged with Polaris.

Financial analysis:

Softer revenue in terms of Dollar: In Q2FY14, rupee revenue increased by 7.4% YoY and 10.2% QoQ to Rs 6433.7mn due to depreciating domestic currency while revenue in terms of Dollar stood at Rs 103.7mn displaying sequential growth of 2.3% and degrowth of 5.7% YoY.

Improved margins sequentially: EBITDA margin was 19.3% as against 17.3% in Q1FY14 and 21.1% in Q1FY13 as EBITDA was Rs 1240mn which was up by 22.7% QoQ but was down by 2% YoY. Backed by lower tax PAT grew by 38.4% sequentially and 8.5% YoY to Rs 598.1mn.

Geography wise revenue: About 47.2% of the total revenue is attributed to US market and 22.4% was contributed from European market while the rest 30.4% came from the other markets.

Segment wise revenue: Contributing about 77.3% of the total revenue FT Sourcing segment was the biggest contributor while FT Intellect and BPO segments contributed 21.6% and 1.1% respectively of the total revenue.

With the share of 54.4% US business played the biggest role in FT Sourcing segment and European business' share was 20.6%. The remaining 25% came from rest of the markets.

On the other hand, the biggest share of 28.7% of FT Intellect revenue was from Europe followed by US business which contributed about 21.2%. The rest 50.1% came from other markets.

Top 10 clients: Top 10 clients were accounted for about 57.8% of the total revenue. Actually 43.3% of the sales were accredited to top 5 clients. It shows high client concentration of the firm.

Capacity utilization higher than the peers: Capacity utilization rate was 82.6% in Q2FY14 which was better than the peers.

Positives:

Benefits of restructuring: The Company's engagement with its clients has increased due to restructuring and benefits of restructuring are likely to be visible in terms of higher growth in FY15.

Improving FT Intellect business: Acceptability for FT Intellect business is increasing and also Polaris has signed TCV worth of $57mn in 2Q that includes a new scope work of $32mn.

Better capacity Utilization: Capacity utilization rate was 82.6% in Q2FY14 which was better than the peers.

Improvement in global financial sector: The financial sector has bounced back from 2008 recession and it is expected that banking and financial institutions are likely to increase their IT expenditures going forward. Being active in financial industry Polaris is most likely to be benefited from the improving conditions.

Valuations:

The stock is trading at Rs 148.10 which is 7.6 times FY13 EPS while the industry average is above 20. The potential of better growth going forward makes the stock a good buy with the target price of Rs 190.