Stock Review: Polaris Software

 

The stock of Chennai-based global financial technologies company Polaris Software has outperformed over the past six months. The stock has gained nearly 4% during the period against a 9% drop in the benchmark index. The company's consistent financial performance over several quarters seems to have infused investor interest in the stock.

Polaris has witnessed a reasonable traction in its topline over the past few quarters now. In the June 2011 quarter, the company posted a 3% jump in its consolidated topline at . 450 crore against the previous quarter. It posted a 100-bp rise in its operating margins to 14% on a sequential basis. It has been in the range of 12-14% over several quarters.

During the quarter, although sales and operating margins improved, the company's net profit took a hit on account of higher expenses and an increase in tax outgo. During the quarter, the company's tax expense in relation to net sales rose by 15 percentage points to 28% against the previous quarter. Besides, last quarter's other income included . 10 crore accrued through property sale which had boosted its bottomline during the quarter. These factors led to a more than 20% drop in the company's bottomline to . 45 crore against the previous quarter.
Polaris expects to post better performance, given a pricing uptick in some of its key projects. Also, the company's core banking product, Intellect, has gained better acceptability, globally. The company has won 15 deals, of which 11 were Intellect wins. During the quarter, Intellect revenue stood at . 105.2 crore, a 3% increase over the previous quarter.

The proportion of the business in the company's overall revenue is likely to increase to 26% by the end of FY12 against 23% currently. This will drive the company's operating margins. Going ahead, being a higher margin business, it offers 25% operating margins against services business which offers 11%. Furthermore, stable macro-environment will offer an extra cushion to the company's operations.

Recently, Polaris has entered into a JV with two banks in Bangladesh and Sri Lanka. It has signed a $55-million deal with the Reserve Bank of India (RBI). With this, the company has revised upwards its revenue guidance for FY12 to $430-440 million from $425-435 million announced earlier. At the current market price of . 176, the stock trades at 8.7 times its earnings for the trailing twelve months.