Polaris - Deal wins a catalyst for further growth - Reliance Securities

Key highlights of the result

- Top-line declined sharply: Polaris' total income declined 9.1% qoq to Rs520cr in 4QFY2012 on account of sharp decline in both Products and Services revenues. Revenues from Products fell 26.6% qoq to ~Rs116cr in 4QFY2012, whereas, revenue from IT services declined ~2.5% qoq to ~Rs405cr primarily due to INR appreciation.

- EBITDA margin declined sharply: EBITDA decreased 38.3% qoq to Rs65cr in 4QFY2012 reflecting the sharp fall in top-line. Further, SG&A expenses increased 14.6% qoq to Rs64cr in 4QFY2012, which impacted profitability. INR appreciation was also a drag on margins. Consequently, EBITDA margin declined ~592bp to 12.5% in 4QFY2012.

- Other income boosts PAT: Other income increased almost three folds from Rs8cr in 3QFY2012 to Rs22cr in 4QFY2012, on account of gain on property sales and higher interest and dividend income. Further, effective tax rate declined ~13% in 4QFY2012. As a result, PAT was flat at Rs61cr.

- Key concall takeaway: Management has provided a strong guidance and expects top-line to grow 17-20% to Rs2,400-2,460cr in FY2013E. Management has indicated that revenue from Products was volatile on a quarterly basis, which has led to a sharp downfall in the margins. Going forward, on a full year basis, management is confident of strong growth in Products business with healthy margins. Management has indicated that it will invest ~Rs40cr in SG&A expenses and further invest in R&D.

Outlook and Valuation

Polaris' result fell short of our expectations. Management has provided strong top-line guidance for FY2013. Polaris has won a few large deals in Products business (including a 15 years deal with a leading European bank), which we believe would lead to strong growth in the coming quarteRs.On a conservative basis we are factoring a top-line growth of ~15% for FY2013E. However, we expect margins to remain under pressure in the coming quarters on the back of investment in SG&A, R&D and wage hikes. Thus, we have revised our margin estimates downwards.

Polaris had appreciated ~23% since our previous Buy recommendation to achieve our target price of Rs166. However, growth concerns surrounding the sector followed by the company's weak result has led to a sharp correction in the stock price. Nonetheless, we now roll over to FY2014 estimates, which gives us a target price of Rs168. However, given the short-term concerns for the company, we recommend an Accumulate on the stock.

Risks to the view

- The uncertainties plaguing the US and European economies can lead to volatility in the earnings in the short term

- We have factored in USD/INR rate of Rs51 and Rs50 for FY2013E and FY2014E respectively. Any sharp appreciation in INR will negatively impact our estimates

- Any delay in commencement of deals or cancellation due to uncertainity in US can result in deviation from our estimates.

Source : Equity Bulls

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