Polaris Software has quality and dedication to grow big

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  • Yes, as it is in the niche segment of financial technology
  • No, its revenues have not grown
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Performance of Polaris in stock market in the last 90 days

Polaris in stock markets
Polaris in stock markets | Source

Polaris Software propels forward

Q1 not satisfactory

Polaris Software has not produced satisfactory results for the quarter ended 30.06.11 when compared to the quarter ended 31.03.11. Revenue has marginally increased from Rs.386 crore to Rs.397 crore. Revenue for the whole year 2010-11 was at Rs.1407 crore. Net profit declined from Rs.51.05 crore to Rs.40.70 crore. Net profit for the year 2010-11 was at Rs.187 crore. Net profit margin declined from 13.21% to 10.23%. The shares of Polaris Software are traded in the Indian stock markets at Rs.140.45 now (05.11.11). The highest price the share recorded was Rs.213.90 on 13.04.11. The lowest price was Rs.115 recorded on 06.09.11. Polaris Software declared a dividend of 45% last year as against 35% in the year before.

High profile executive resigns

Last month, Polaris Software’s Chief Financial Officer and partner R. Srikanth resigned, citing personal reasons. He was an important member of the company’s Business Corporate Heads. He joined Polaris Software in July 2006. Srikanth has more than 24 years of experience in the fields of business management and finance. You can gauge the importance of Srikanth if you know that he was heading the company’s Treasury, Finance, Investor Relations, Accounting, Compliance, Legal, Secretarial Functions and Corporate Governance. He was doing all these jobs for not only Polaris Software but also for its subsidiaries worldwide. Previous to this assignment, Srikanth was working at Wipro BPO Solutions as its Associate CEO. He is also a fellow member in the Institute of Cost and Works Accountants of India and Institute of Chartered Accountants. The share price of Polaris Software declined by around Rs.9 because of Srikanth's resignation. When such a high profile executive resigns, there could be two reasons. One, Srikanth may be planning to move to greener pastures by starting his own business venture with his rich experience. Or else, he has quit because of misunderstanding with the company’s Board. If it is the second reason, Polaris Software stands to lose heavily.

Q2 results better

The resignation came just a day before the company announced its second quarter results ending 30.09.11. It posted revenue of Rs.509 crore during the quarter as against a figure of Rs.388 crore in the corresponding period of the previous year. Operating profit increased by 25% to Rs.75.54 crore from Rs.60.24 crore in the corresponding period of the previous year. Profit after tax increased by 12% to Rs.53.94 crore from Rs.48.15 crore in the corresponding period of the previous year. Revenue from products increased by 68% to Rs.139 crore from Rs.83 crore in the corresponding period of the previous year. Services revenue grew by 21% to Rs.370 crore from Rs.305 crore in the corresponding period of the previous year. USA contributed 45% of the revenues, Europe 22%, IMEA 15% and Asia Pacific 16%. The company is a cash rich company with balance in its cash kitty at Rs.417 crore.

Optimus was a failure

The company anticipates revenue of around Rs.2050 crore in 2012. Polaris Software is an Indian IT company catering to the IT requirements of financial services, banking and insurance sectors. Polaris Software has decided to integrate its wholly owned subsidiary Optimus Global Services Ltd with itself. The subsidiary is operating in BPO sector. It provides back office operations. It will now become a separate business unit under Polaris Software. Polaris Software is headquartered in Chennai. The company is also planning to integrate its other subsidiaries with itself in future. The company has 20 subsidiaries including Optimus. 14 subsidiaries are in foreign countries. Optinus offers to the customers in banking, financial services and insurance sectors, services like addressing customer complaints, customer service improvement, e-mail management and dispute resolving. Optimus has around 700 employees. Last year, Optimus reported revenue of Rs.16.66 crore and a net loss of Rs.3.15 crore.

More a financial technological company than a software firm

Polaris Software considers itself more as a financial technological company than as a software company. The company management feels aggrieved that the analysts and the stock markets are valuing the company based on software yardsticks and benchmarks. Therefore, in order to present itself as a firm engaged mainly in financial technology, Polaris Software has decided to rename itself as Polaris Financial Technologies. Necessary approvals are being sought for the purpose. Even though Polaris Software was started in 1993, it was lagging behind some of the other IT companies in revenue growth.

FT-Grid launched

Polaris Software has launched FT-Grid, the largest cloud computing offering with a capability to meet the needs of hundred million clients. Banks and financial institutions can use the company’s financial technology infrastructure on a pay-per-use (cloud) model. FT-Grid will be hosted on a ready-to-use platform with facilities like middleware, industry-standard hardware, network connectivity components and RDBMS (Relational Database Management System). For launching FT-Grid, Polaris Software has created a separate business unit and a wholly owned subsidiary Polaris Financial Technologies. For obtaining scalable and reliable IT infrastructure for FT-Grid, Polaris Software has partnered with IBM and IdenTrust. Polaris Software has housed two data centres in the business unit that have come at an investment cost of Rs.91 crore. FT-Grid has come in three variants. It will cater to the three major international banking branches namely capital markets, core banking and corporate banking. It possess full enterprise class cloud and solution with multiple features like scalability, virtualisation, global reach, reliability, information security, vernacular localisation and 24 x 7 x 365 support. The customer will receive services at his door steps. So far, the company has implemented FT-Grid in two banks. IBM’s virtualisation technology will bring down the infrastructure cost and at the same time it will provide scalability and reliability in the FT-Grid.

$55 million deal with RBI

Polaris Software’s core banking product Intellect has gained respectability in global banking sector. The company has won 15 deals, out of which 11 were Intellect wins. Intellect’s quarterly revenue has crossed the coveted Rs.100 crore mark. Intellect is a challenge to Infosys’ Finnacle software. Polaris Software has entered into a joint venture deal recently with two banks in Bangladesh and Sri Lanka. It has also signed a deal with Reserve Bank of India amounting to $55 million. Polaris Software will implement core banking solution in the offices of RBI. It is intended to integrate the operations of RBI with all its offices and departments all over India. RBI has 22 regional offices, most of them in the State capitals. It will be a ten year deal. It is pertinent to note that RBI opted for Polaris Software and not established players like Infosys, Wipro and TCS. This shows the quality of the company’s products. With this kind of quality, it won’t be long before the company succeeds penetrating the markets in European countries, USA and other places. Building a company mainly on products in the IT space is a tough proposition. But Polaris Software has achieved this remarkable feat.

Focusing on products

But in products category, it will not be an easy going for Polaris Software. Tough competition is ahead of it. The IT leader TCS has set up a separate products division and has put a very senior person in charge of it. IT companies have realised the value of products and are gearing to have a go at it in the immediate future. Polaris Software is aiming at a 25% sustained growth every year. The challenge is to scale up. Polaris Software acquired the US-based IdenTrust recently at an investment of $20 million. IdenTrust has the technology to build fool-proof digital security. It is the global leader in trusted identity solutions. Assuming that by 2015, 40% of all transactions go digital, then the need for digital security will rise up. Polaris Software also acquired LaserSoft because it had 40 Indian accounts which were quite useful to the company. But Polaris Software’s judgement in starting a BPO venture as early as in 2002 failed miserably. Polaris Software started Optimus with a belief that credit card business in India will grow and get outsourced. But it has not happened. Now Polaris Software is planning to shift Optimus from credit card business to some other viable banking operation.

25-year old relationship with Citicorp

Polaris Software has a 25-year old relationship with Citigroup. It is the longest relationship any vendor had with the customer in India. The relationship is worth $150 million and has grown by an average of around 17% every year. The relationship fetches 40% of the company’s revenue. At one point of time, the figure was as high as 70%. Adding large clients like Citicorp to the customer base helps Polaris Software to stabilise its revenue and profits. But at the same time, a very high proportion of a few large clients can also destabilise the business all of a sudden. Diversification of clients is an important business strategy for the companies.

Buy for medium term

At the current market price of Rs.140, the shares of Polaris Software can be acquired for medium term holding of upto three years for decent returns.


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