Polaris Financial Technology - De-merger of Product business - Prabhudas Lilladher

Polaris Financial Technology (Polaris) announced demerger of its Product (Intellect) into an independent entity. As consideration for the Demerger, every shareholder of Polaris will receive one share of Intellect. The company will be filing the 'Scheme of Demerger' with SEBI and High Court as per extant regulations.

- Vertical split of the company into Services and Product business - The current status: The board has approved the split of Polaris into Services (~77% of revenue) and Product (~23% of revenue) as per Q3FY14. Product contributes ~26% of group EBITDA. Product business grew at a CQGR of 2.9% over the last four quarters, whereas Services business was muted.

Deal structure: Every shareholder of Polaris will receive one share of Intellect. The deal will offer a special option to the shareholders of Intellect to exchange the shares allotted pursuant to the Demerger against fully secured nonconvertible debentures (NCD). These NCDs shall have a face value of Rs.42/-, with a coupon of 7.75% p.a., redeemable at par after 90 days.

- New CEOs were already in place for businesses: Mr. Jitin Goyal (CEO, Services business), Mr. Manish Maakan (CEO, Intellect Global Transaction Banking), Mr. Jaideep Billa & Mr. Venkatesh Srinivasan (Jt. CEO Intellect Global Universal Banking and Intellect Risk & Treasury business) and Mr. Pranav Pasricha (CEO, Intellect Insurance) were already appointed in previous restructuring.

- Easier ownership under the new structure: We believe that investment cycle for Product business is very different from that of services business, hence, spinoff as a separate entity could unlock the value for the investors. Moreover, we believe the current structure is simpler for the management, if they decide to exit completely (sell-out) from either of the business.

- Valuation and Recommendation - Pedestrian valuation restrict downside: Polaris trades at ~5x FY16 earnings estimates, one of the lowest in our coverage universe. We believe the improving demand environment would improve revenue momentum for both Services and Product business. Reiterate 'Accumulate' with near-term upside in the stock price.

Source : Equity Bulls

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