Polaris Software

Laboratories Ltd
Initiating Coverage Polaris Software Laboratories Ltd
Recommendation BUY Snapshot
Polaris is a recognized global leader in Specialty Application
CMP (07/12/2009) Rs. 177
Development for the Banking, Financial and Insurance sector, with its
Sector Information Technology comprehensive portfolio of products, smart legacy modernization
Stock Details services and consulting. Company’s top-line has grown with a CAGR
of more than 25% during FY 2002- FY 2009. Polaris has made some
BSE Code 532254
acquisitions recently to further fuel its top-line growth and build a
NSE Code POLARIS portfolio of comprehensive solutions for core banking, corporate
Bloomberg Code POL IN banking, wealth and asset management and insurance.
Market Cap (Rs. cr) 1747.98
Free Float (%) 53.88 Key Positives
52- wk HI/Lo 192.4/26.3  Polaris’ client base for Intellect products has been increasing
Avg. volume BSE (Monthly) 461345 constantly over last few quarters and thereby providing
Face Value Rs.5.00 earnings visibility for the company.
Dividend 55%  Expanding presence in emerging economies to further boost
Shares o/s (Crs) 9.87 the company’s top-line growth. Recently company has
Relative Performance 1Mth 3Mth 1Yr expanded its presence in Vietanam, Egypt and Chile and
Polaris 7.4% 26.1% 382.6% continues to look for expanding its geographic presence
thereby reducing the dependence on the US and Europe.
Sensex 2.9% 5.3% 85.4%
18000 220  Constant thrust for acquisition has enabled Polari’s to
16000 register strong growth over last couple of years. The recent
14000 acquisition of Laser Soft Infosystem Ltd (Laser Soft) will not
120
12000 only assist the Polaris’ top-line growth but will also provide it
10000 with 40 customers of Laser Soft.
8000 20
 Strong balance sheet and cash position to enable more
Dec-08 Mar-09 Jun-09 Sep-09
acquisitions going forward.
Sensex Polaris

Valuation & Recommendation

Shareholding Pattern as of 30/09/2009
At the current market price of Rs 177 per share, Polaris is currently
Promoters Holding 29.16% trading at a PE of 12.32x FY10E and 9.58x FY11E EPS estimates, which
Institutional (Incl. FII) 34.39% looks quite attractive. Based on our estimated EPS of Rs 18.48 for FY
Corporate Bodies 20.11% 2011 and a target PE multiple of 13.0x we arrive at a target price of
Rs. 240 per share for Polaris. We recommend a BUY rating on the
Public & others 16.34%
stock with a long term view.
Ashish Khetan – Research Analyst (+91 22 3027-2259)
ashish.khetan@nirmalbang.com
Year Net Sales Growth % EBITDA Margin % PAT EPS PE P/BV ROE %
FY 2008A 1,099.3 6.5% 118.2 10.8% 73.2 7.42 23.87 2.66 11.1%
FY 2009A 1,377.9 25.3% 233.5 16.9% 130.7 13.25 13.37 2.26 16.9%
FY 2010E 1,347.0 -2.2% 227.6 16.9% 141.9 14.38 12.32 1.98 16.1%
FY 2011E 1,497.0 11.1% 260.2 17.4% 182.4 18.48 9.58 1.69 17.7%
Initiating Coverage Polaris Software Laboratories Ltd
Company Background
Polaris Software Laboratories Ltd (Polaris) was founded in 1993. Polaris is a recognized global
leader in Specialty Application Development for the Banking, Financial and Insurance sector, with
its comprehensive portfolio of products, smart legacy modernization services and consulting.
Polaris started providing retail banking solution to Citi Bank in India in 1994. Currently, Citi Bank
remains the company’s largest customer accounting for more than 40% of the company’s
revenues. Citi Bank also took a 43% stake in the company after the merger. Citigroup holds stake in
Polaris through two entities viz, OrbiTech Ltd and Citibank A/C CVC. However, recently Citigroup
has reduced its holding in Polaris to 39%.

Over the years Polaris established its solutions and services footprint globally. Headquartered in
Chennai, India, the company has presence in Australia, Bahrain, France, Germany, Hongkong,
Ireland, Japan, Korea, Saudi Arabia, UAE, Singapore, Switzerland, United Kingdom, United States
and Canada through its work field offices. It has opened subsidiaries in many of these countries.

Revenue by Geography (Q2 FY10)

21.4%
43.0%
8.1%

27.5%

US/North America Europe

India Asia Pacific & Japan
Source: Company data

Polaris has significant exposure to US and Europe from where company’s records its 70% of the
total revenues. However, going forward we believe that with the acquisition of Laser Soft and
company’s thrust on expanding business in other emerging economies will help the company
reduce its dependence on the US and Europe. Going forward, we expect the contribution from
India to increase with the acquisition of Laser Soft. In the long term, Management expects the
revenue contribution from India to increase to 10%.

In 2003, Polaris acquired Citibank's banking IT arm OrbiTech Solutions and transformed it into the
world's leading Financial Technology Corporation. Polaris also launched Intellect and Optimus in
2003 which remains the company’s top selling products.
Initiating Coverage Polaris Software Laboratories Ltd
Business Model

Polaris is the chosen outsourcing partner for 10 of the top 15 global banks and 6 of the 10 top
global insurance companies. Polaris offers comprehensive solutions for core banking, corporate
banking, wealth and asset management and insurance.

Products
Polaris provides software products for banking sector. Intellect Suite is the company’s flagship
product and provides a variety of solutions to the customers

Intellect Suite

Intellect Suite is a modern and proven enterprise platform that meets the needs of retail,
corporate and investment banking. It enables banking across business units, geographies and
technologies. The platform is web-enabled, multi-currency and multi-lingual which enables the
banks to service markets in diverse geographies and cultures.

Intellect is based on (Service Oriented Architecture) SOA architecture and is built with re-usable
Business Applications and Components, which makes it highly modular and flexible. Intellect has 9
products and 20 independent saleable modules.

Polaris’ Intellect Suit consists of following modules

 Universal Banking
 Consumer Finance (includes Lending and Collect)
 Credit Card solution
 Risk & Treasury solution
 Portals and Internet Banking
 Cash and Liquidity solution
 Wealth Management solution
 Custody solution

Intellect enables cross-selling and up-selling by its versatile ‘Single customer view’ and helps tellers
to perform smart service. The following graph gives a snapshot of the company’s product offerings.
Initiating Coverage Polaris Software Laboratories Ltd

Source: Company website

Services

Polaris provides application management services to maintain, reengineer, aggregate and

upgrade portfolios of business applications cost-effectively by leveraging its continuously
replenished warehouse of intellectual property. Polaris provides services in six areas namely
Technology, Enterprise solutions, Testing, Performance Engineering, Domain led and
Infrastructure led.

Services offered

Technology Enterprise Testing Performance Domain Infrastructure

Solutions Engineering Led Led

Microsoft .NET Oracle Pace Performance Risk & ITEMS

IBM Mainframe SAP Calypso Engineering Treasury
Infor BaaN
Siebel
DWH/BI
ECM

Source: Company data, Nirmal Bang Research

Initiating Coverage Polaris Software Laboratories Ltd
BPO
Polaris provides outsourcing solutions in four areas; Retail Banking, Corporate Banking, Investment
Banking and Insurance.

Retail Banking
Company’s major offerings in Retail Banking include Retail Banking solutions and services, Credit
cards, Internet Banking, Mortgages practice and Multi-Channel Integration.

Corporate Banking
Polaris custom solutions in Corporate Banking includes Risk and Treasury Management , Cash
Management, Portals and Trade Finance.

Investment Banking
With the right combination of business analysts, project managers and developers, experienced in
the Investment Banking domain, Polaris has delivered several projects in complex areas like
Custody Solutions, Mutual Funds, Portfolio Management and Securities Administration across
geographies.

Insurance
As a technology partner of global insurance clients, Polaris combines the understanding of
insurance industry requirements with the technology expertise to develop and deliver
techno-business solutions.

Revenues by Products/Services (Q2 10)

17%
3% 1%
1%

78%

Intllect Product BPO revenue PRIL

SEEC Other soft servieces

Source: Company data

Polaris generates majority of its revenues through software services segment. Revenue
contribution from products has remains in the range of 18-20% over last 2-3 years. Revenues from
BPO business has declined significantly over last 4 quarters reflecting the slowdown in the global
economy.
Initiating Coverage Polaris Software Laboratories Ltd
Revenues by Industry verticals (FY 2009)

9%

91%

BFSI Emerging verticals

Source: Company data

Polaris caters primarily to BFSI sector and generates more than 90% of its total revenues from this
segment. It recently entered into retail space though its subsidiary (PRIL) in order to expand the
opportunities presented by retail sector.

Revenues Mix

Polaris has historically focused on onsite delivery location which is evident from the company’s
onsite and offshore revenues mix. However, since the recent slowdown company has to shift its
focus on offshore delivery which has impacted the company’s top-line to some extent. Going
forward, the Management expects the contribution of onsite revenues to increase to the historical
levels of 58-60% from the current 51% in Q2 FY 2010.

70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q1 10
Onsite Offshore
Source: Company data

Utilization Rate

Utilization rate has constantly increased over last 3-4 quarters reflecting the cost cutting strategy
of the company.
Initiating Coverage Polaris Software Laboratories Ltd
82.0%
80.0%
78.0%
76.0%
74.0%
72.0%
70.0%
68.0%

Source: Company data

Major Subsidiaries

Optimus
In 2002, Polaris formed Optimus Global Services Ltd (Optimus) with a view to enter in the BPO
segment. Optimus acquired Bangalore based customer interaction services company iBackoffice to
get immediate entry into the BPO space. Moreover, through this acquisition Optimus got access to
ready-to-use infrastructure and skilled staff including key Management staff and the client base of
iBackoffice including contracts in the pipeline.

Optimus provides a complete spectrum of back office services in the banking and financial services
sector. During recent years, in order to reduce the dependency on the Banking segment, Polaris
plans to expand its footprint in the fast emerging and rapidly growing Insurance & Telecom
verticals. In FY 2009, revenues from Optimus increased 10.3% to Rs. 61.61 Crs contributing around
4.5% to the company’s total revenues.

SEEC Inc
Polaris acquired 100% stake in SEEC Inc in November 2008 for cash consideration of US$ 7 mn. As
part of the transaction Polaris also acquired SEEC’s Intellectual Property Rights worth US$ 1 mn.
SEEC Inc is a US based Product and Component Services company focused on the Insurance
vertical. SEEC Inc is engaged in the business of developing, marketing, selling, supporting business
component and application management software solutions for clients primarily in Life &
Annuities, P&C and Healthcare Insurance.

This acquisition will enhance the company’s product portfolio and extend its footprint into the
Insurance vertical. After the acquisition, SEEC Inc was renamed to “Intellect SEEC Inc” by Polaris.
The subsidiary reported revenues of Rs 9.84 Crs and profit of Rs 0.80 Cr during Nov 08 –Mar 09.

PRIL
In order to enter in fast growing retail segment Polaris formed Polaris Retail Infotech Limited (PRIL)
in November 1998 as its wholly owned subsidiary. PRIL caters to the needs of large, midsized and
small format retailers across categories and geographies. It offers Products, Services & Consulting
addressing the retailer’s needs ranging from building efficient check out system, Merchandise &
Planning Systems, Supply chain Management system to specialized offering like Quebusting, RIFD
& E-tailing.
Initiating Coverage Polaris Software Laboratories Ltd
Industry Analysis
The global IT industry’s revenues increased 5.6% y-o-y to US$1,560 bn in 2008 (Source: CRISIL).
Going forward, the IT industry’s revenues is expected to grow at a moderate growth of 3.5% y-o-y
in 2009 on the back of lower IT spending by the clients owing to the slowdown. However, with the
economic recovery the demand for IT is expected to increase rapidly in the long term. CRISIL
expects the global IT spending to increase at a CAGR of 5.2% over 2008-2012.

Global IT spending forecast

2,000

1,500 683
652
597 620
570 594
1,000 349 376
308 326
277 295 181
131 146 164
103 115
500
528 557 578 605 636 672

0
2007 2008 2009E 2010E 2011E 2012E

Hardware Software ITES-BPO IT Service

Source: International Data Corporation, CRISIL

The Indian IT industry has been growing at a CAGR of 27.0% over the last 5 years (2004-2009).
However, the growth rate declined significantly to 11.8% in FY 2009 owing to recession in key
markets of the US and the UK. The US continues to be the largest export market for Indian IT and
ITES services accounting for approximately 60% of the India’s total IT exports. Moreover, clients
across all regions are adopting cost cutting measures and seeking concessions on billing rates from
the vendors to combat the recession.

The Indian IT industry is estimated to have registered revenues of approximately US$71.7 bn in FY

2009 with IT software, BPO and IT services industry accounting for US$59.6 bn of these revenues.
The share of this sector as a percentage of India’s total export has increased from less than 4% to
in FY 1998 to approximately 16% in FY 2008.
Initiating Coverage Polaris Software Laboratories Ltd
Revenues from Indian IT industry (excluding Hardware)

80 40.0%

60 30.0%
US$ bn

%
40 20.0%

20 10.0%

0 0.0%
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 E
IT Services ITES-BPO Software products & engineering services y-o-y
Source: NASSCOM, CRISIL

India’s IT-BPO industry’s export revenues are estimated to be approximately US$47.3 bn in FY 2009
(accounting for 66 per cent of the total IT-BPO industry revenues). The IT industry’s export growth
rate plunged to around 16% in FY 2009 as compared to 29.0% in 2008. However, the growth
prospects for the IT sector looks bright with the improvement in the global economy.

The BFSI industry is the largest customer of the IT services accounting for approximately 40% of
the India’s total IT-ITeS exports. The performance of the BFSI sector is closely related to the
economic cycles. Therefore, given the slowdown in the major markets (the US and the UK) and the
global financial turmoil the demand for IT and ITeS is expected to remain low in near to medium
term.

India’s IT exports by industry verticals (FY 2009E)

3% 3%
4%
5%
3%

40%
8%

15%

19%

BFSI Hi-tech / Telecom

Manufacturing Retail
Media, publishing & entertainment Construction & utilities
Healthcare Airlines & transportation
Other
Source: CRISIL
Initiating Coverage Polaris Software Laboratories Ltd
IT services revenue growth and hiring
50%

40%

30%

20%

10%

0%
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 E
Revenues growth Employee addition
Source: NASSCOM, CRISIL

There is high correlation between the top-line growth of IT companies and its employee’s growth.
With the decline in top-line in 2008 the IT companies reduced its employee growth rate to control
the cost.
Initiating Coverage Polaris Software Laboratories Ltd
Investment Rationale

Strong client base

Over the years company has established strong client base. Polaris has strong geographic presence
and has developed client in many emerging countries in recent years. With more than 200
customers for Intellect Global Universal Banking Platform, Polaris continues to expand its reach. In
the IT services space company caters to 15 of the top 25 banks globally. In all company have 53
large customers. While Citigroup continues to be major client, some of the other global clients of
the company are SEB, Shinsei Bank, Mekong Housing Bank, and Deutsche Leasing. In India, Axis
Bank, HDFC Bank, and ICICI Bank are clients. With the Laser Soft acquisition Polaris has acquired 40
new accounts majority of which includes the Indian banks. SBI, Corporation Bank and Andhra Bank
are a few clients among the 12 PSU banks that Laser Soft caters to. The insurance client base
includes 6 of the top 10 insurance companies globally. With the acquisition of SEEC, company
intends to further expand its presence in insurance. AIG, New York Life, ICICI Prudential, Kiln, IDBI
Fortis are some of the company’s major client in insurance segment. We believe that this strong
client base will enable the company to register steady revenue growth in the long term.

Increased in Global IT spending to boost company’s growth prospect

With the expected improvement in the global economy and increased client spending on IT we
expect the demand for IT products and services to remain high in the long term despite the short
term challenges. In the Indian Economic Summit on 10 November 2009, the NASSCOM’s president
said that NASSCOM expects the Indian IT sector to grow at 4%-7% during FY 2010. However,
NASSCOM expects the IT sector to return to double digit growth from FY 2010 which the industry
has witnessed over last few years. Moreover, NASSCOM expects the IT industry to grow at a CAGR
of 14% for next 10-12 years and expect it to reach to around $225 bn by 2020 from $50 bn at the
end of FY 2009. We believe that the overall growth in the IT sector will boost the company’s
growth prospects and enable it to grow further.

Constant client addition

Polaris has successfully expanded its client portfolio over last few quarters. Company has
consistently added more than 10 clients every quarter during last 3-4 years. Moreover, clients for
company’s major product ‘Intellect’ is increasing over last couple of quarters which indicates
increasing demand from clients. In Q2 FY10, Polaris recorded 12 wins for its Intellect product.
Recently Polaris also signed a contract with Vietnam-based Saigon Hanoi Bank wherein company
will provide “Global Universal Banking — Intellect 10.0” platform to the bank which will comprise
of core, lending, trade, treasury and Portal functionalities of Intellect 10.0. Going forward, we
believe that with the increased demand for IT sector company will be able boost its client base
which will benefit the company in the long term.
Initiating Coverage Polaris Software Laboratories Ltd
Client wins over last 3 years
25

20

15

10

Source: Company data, Nirmal Bang Research

Strong product portfolio

Polaris’ product Intellect has gained strong footing in the international market. Over the last few
years company’s revenues from product has increased consistently indicating the increased
demand for the product. Company’s Intellect Product Suite consists of 9 products and 20
independent saleable modules. The Banking suite achieved 21 wins during FY 2009 and is
continued to be ranked among the leading global banking platforms by Market Analysts.
Moreover, company’s product has gained traction in various geographies. The company’s product
saw success in markets beyond US and UK, such as Latin America and Vietnam by winning
prestigious deals from leading local Banks. Going forward, the company plans to expand Intellect’s
reach to more than 50 countries by 2013.

Intellect Product Client wins

14
12
10
8
6
4
2
0

Source: Company data, Nirmal Bang Research

Initiating Coverage Polaris Software Laboratories Ltd
Acquisitions to bolster top-line growth

Along with the organic growth, Polaris’ thrust for inorganic growth avenues has enabled the
company to expand its top-line. Polaris’ strategic acquisition of SEEC Inc, a leading SOA product
line for the Insurance segment added to the competitive edge of the company in the Insurance
Vertical and also provided competitive edge in the Legacy Modernization space through SEEC’s
Application Management Suite. SEEC acquisition marked the company’s foray into the Insurance
Vertical globally, with the launch of a comprehensive offering stack for this segment. With this
acquisition company’s clients increased to 23 in the insurance segment including 6 of the top 10
insurance companies as its customers.

Polaris continued its hunger for acquisition and acquired Laser Soft Infosystems Ltd (Laser Soft) in
Q3 FY10. Laser Soft is a leading banking software products company, specializing in serving the
unique needs of India & emerging markets. It has proven solutions in Core Banking, Trade Finance,
Treasury, Cash Management, Mutual Funds and Loans serving over 50 customers including leading
banks such as Corporation Bank, State Bank of India, ICICI Bank, Mashreq bank, Catholic Syrian
Bank, Andhra Bank, EXIM Bank of Tanzania and KEP Trust, Kosovo. With this acquisition and
company’s Intellect product the company intends to build a robust and complementary solution-
set that is uniquely suitable for emerging markets and will support its market proliferation
plan. Polaris has acquired Laser Soft for Rs 52 Crs of which Rs. 35 crores will be paid in cash on
closing of the transaction and the balance amount will be paid out in 2 years contingent to
performance, and will be funded entirely through the company’s internal accruals. The acquisition
is expected to add Rs 48-50 Crs of revenues in one year (November 2009 to October 2009) and will
increase the EPS by Rs 0.80 to 1 during the same peiod. We believe that this acquisition will boost
the company’s presence in India and will enable it to expand its product portfolio. With the
acquisition, Polaris will get access to 40 clients of Laser Soft in India and other emerging countries.
Moreover, Polaris’ plan to take Laser Soft’s core banking product to other emerging economies
further adds optimism to our outlook.

Strong balance sheet

Polaris has maintained a strong balance sheet. Over the last few years company has consistently
increased its cash balance despite pursuing acquisitions. The company’s cash and cash equivalent
balance has increased from Rs 134 Crs at the end of FY 2007 to Rs 349 Crs at the end of FY 2009
which has strengthened to Rs 443 Crs at the end of Q2 FY10. Despite paying Rs 35 Crs for the Laser
Soft acquisition, we expect the company’s cash position to remain strong. Polaris’ cash per share
stands at approximately Rs 45 which we believe is very strong as compared to some of its larger
peers. We believe that company’s strong balance will enable the company to go for further
inorganic growth in coming years.

Company Cash / M. Cap

Pol aris Software Lab 25.5%
Mastek Ltd 20.5%
MindTree Ltd 3.6%
Hexaware 29.8%
Nucleus 33.0%
Source: Company data, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Hedging strategies

Revenues of IT companies are adversely impacted due to appreciation of INR against US dollar. INR
has appreciated sharply over last few months and its constant appreciation is expected to hurt the
top-line of IT players in FY 2011. In this scenario, Polaris is well placed as compared to some of the
peers as company has entered into hedging contracts at a rate or Rs. 48.20 for FY 2011 to the
extent of US$ 100 mn (30%-35% of the company’s expected top-line for FY 2011). This will partially
mitigate the impact of appreciation of INR in FY 2011.
54
52
50
48
46
44
42
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Source: Bloomberg, Nirmal Bang Research

Risks & Concerns

Slow recovery in the economy will keep IT spending subdued

We expect that the recovery in the global economy will create strong growth opportunities for the
company and increased IT spending will lead to higher top-line growth for the company. However,
if the economy remains under pressure or the pace of recovery is very slow then it will adversely
impact the IT spending budgets of the clients and would thereby lead to lower growth of the IT
industry. This would hamper the company’s top-line and margin growth and would lead to a
deviation from our estimates.

Client concentration can hamper top-line growth

Citi group continues to be the company’s largest revenue generator. Although Citi group’s
contribution to total revenues has gone down over last 3 years from around 58% in end of FY 2006
to around 40% in FY 2009 it still remain very high which could adversely impact the company going
forward in case the Citi group adopts cost cutting measures. Moreover, company generates
approximately 50%-55% of its revenues from top 10 clients and if the company stands to lose any
of its major client, its revenues and margins will be adversely impacted.

High exposure to BFSI vertical remains a concern

Polaris’ generates more than 90% of its revenues from BFSI vertical and is therefore highly exposed
the volatility in the BFSI sector. Although company has started to make efforts to diversify its
business vertical through entering into retail space through PRIL, the contribution from PRIL
remains very negligible to the company’s top-line. If the economy fails to recovers and the impact
of financial crisis intensifies further the BFSI industry’s top-line will suffer the most which will
Initiating Coverage Polaris Software Laboratories Ltd
negatively impact the growth prospects for the company and thereby will lead to a deviation from
our estimates.

The Year so Far

 Polaris’s reported revenues grew 3.9% q-o-q to Rs. 338.3 crs in Q2 FY10 primarily driven
by increase in volumes. On a y-o-y basis, revenues were marginally down by 1.8% due to
decline in revenues from the BPO segment.

 The company reported EBITDA of Rs. 53.5 crs in Q2 FY10 as compared to Rs. 55.2 crs in
Q1 FY10 due to increase in software development expenses. Consequently, EBITDA
margins declined 110 bps to 15.9% in Q2 FY10.

 Polaris reported net profit of Rs. 35.2 crs in Q2 FY10 as compared to Rs. 31.8 crs in Q1
FY10 registering growth of 10.2% y-o-y. Adjusted net income (after adjusting for profit on
investment and one time amortization of intangibles in Q2 FY09) increased 6.2% y-o-y.

Income Statement (in Rs Crs.)

Q2 FY10 Q1 FY10 Q-o-Q Q2 FY09 Y-o-Y

Revenues 338.31 325.53 3.9% 344.41 -1.8%

Softwa re devel opment expenses 220.65 207.86 6.2% 229.17 -3.7%
Gros s profit 117.65 117.67 0.0% 115.24 2.1%

General & Admini strati on exp 28.26 27.70 2.0% 30.11 -6.2%
Sel li ng & Ma rketi ng e xp 35.52 34.74 2.2% 34.35 3.4%
EBITDA 53.88 55.23 -2.5% 50.78 6.1%
margin 15.9% 17.0% 14.7%
Depreci a ti on & Amortiza ti on 8.74 8.44 3.5% 10.79 -19.1%
Fi nance cha rges 0.17 0.17 0.4% 0.17 4.8%
Excha nge ga in/(l oss ) -8.58 -13.30 -35.5% 0.00 N/A
Other income 4.05 4.29 -5.6% 0.00 N/A
Profi t on sa l e of Inves tments 0.00 0.00 N/A 13.01 N/A
Sha re of as s oci a te compa ni es -0.42 0.00 N/A -0.68 -39.2%
Inta ngi ble As s ets - Amortized ful ly 0.00 0.00 N/A -11.73 N/A
Income before taxes 40.02 37.60 6.4% 40.42 -1.0%
margin 11.8% 11.6% 11.7%
Income taxes 4.82 5.77 5.99
Net income 35.20 31.84 10.6% 34.43 2.2%
margin 10.4% 9.8% 10.0%
Adjusted net income 35.20 31.84 10.6% 33.15 6.2%
margin 10.4% 9.8% 9.6%
Source: Company data, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Peer Comparison

The company has reported strong sales growth in FY 2009. We are comparing Polaris with Mastek
Ltd, Mindtree Ltd, Heaxware Technologies Ltd (Hexaware) and Nucleus Software Exports Ltd
(Nucleus) as these company’s operate in similar business and has significant exposure to BFSI
sector. Polaris has witnessed a CAGR growth of 25% in its top-line during FY 2002-2009 which is
higher than that of Mastek Ltd and Hexaware. Polaris has very insignificant debt in its book as
compared some of its peers. On the valuation front, Polaris is currently trading at 12.82x P/E based
on TTM earnings which is marginally above the per group average of 12.58x. The company is
currently trading at 2.08x P/BV as compared to the per group average of 2.43x. Furthermore the
company is currently trading at an EV/EBITDA multiple of 5.29x as compared to industry average of
5.83x. Based on these multiples Polaris looks fairly attractive as compared to its peers.

Company Sales M. Cap EV Price EPS PE RONW EV/ S EV/ EBIDTA P/ BV

(Rs Crs) (Rs Crs) (Rs Crs) (x) (%) (x) (x) (x)
Polaris Software Lab 1,373.7 1,747.9 1,301.8 177.1 13.81 12.82 16.2% 0.95 5.29 2.08
Mastek Ltd 874.2 1,113.8 943.9 412.5 46.81 8.81 23.8% 1.08 6.34 2.10
MindTree Ltd 1,321.5 2,650.8 2,557.3 676.4 34.24 19.75 24.2% 1.94 8.14 4.79
Hexaware 1,092.0 1,350.3 966.4 94.0 8.02 11.71 14.4% 0.88 4.58 1.69
Nucleus 321.3 393.3 263.5 121.5 12.41 9.79 15.3% 0.82 4.79 1.50
Industry Average 12.58 18.8% 1.13 5.83 2.43
*TTM Basis
Source: Company Data, Capital Line, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Valuation & Recommendation

We expect the company’s EPS to increase from Rs 13.25 in FY 2009 to Rs 14.38 in FY 2010. We
expect strong top-line growth in FY 2011 driven by increase in demand and acquisition of Laser
Soft. Moreover, expect the company’s EBITDA margins to increase over next couple of years
reflecting the cost cutting measures adopted by the company. Consequently, we expect EPS to
increase 28.5% in FY 2011 to Rs 18.48.

During March 2004 to July 2007, company’s PE multiple has remained above 15.0x. However, after
the financial meltdown and global slowdown the multiple declined very sharply. Currently Polaris’
is trading at a PE multiple of around 12.82x. Going forward, we believe that the company’s PE
multiple will increase with the expected growth in the top-line and bottom-line. Our target PE
multiple of 13.0x is broadly in line with the average of the peer group multiple. Based on the target
PE of 13.0x and our estimated EPS of Rs 18.38 we get a target price of Rs. 240 for Polaris which
represents a 35.6% upside from the current levels. We recommend a BUY rating on the stock with
a long term view.

P/E Band
400

350

300

250

200

150

100

50

0
Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Apr-09

PSL PER - 5 PER - 10 PER - 15 PER - 20 PER - 25

Source: Nirmal Bang Research

Initiating Coverage Polaris Software Laboratories Ltd
Income Statement (in Rs Crs.)
2007 2008 2009 2010E 2011E 2012E

Revenues 1,032.4 1,099.3 1,377.9 1,347.0 1,497.0 1,646.7

Software development expenses 658.3 744.7 885.4 868.8 961.1 1,050.6
Gross profit 374.1 354.6 492.5 478.2 535.9 596.1

General & Administration exp 102.1 111.3 122.3 118.5 130.2 141.6
Selling & Marketing exp 110.7 125.1 136.8 132.0 145.5 158.1
EBITDA 161.3 118.2 233.5 227.6 260.2 296.4
margin 15.6% 10.8% 16.9% 16.9% 17.4% 18.0%

Depreciation & Amortization 48.1 46.0 50.5 52.3 57.4 60.7

Finance charges 0.8 0.8 0.7 0.9 0.7 0.7
Exchange gain/(loss) 0.0 14.5 -56.4 -21.9 0.0 0.0
Other income 6.2 3.7 24.8 15.7 19.2 25.2
Share of associate companies 2.4 -0.2 0.9 0.9 0.9 0.9
Income before taxes 121.0 89.3 151.6 169.2 222.2 261.1
Income taxes 19.9 16.1 20.9 27.3 39.8 46.8
Net income 101.1 73.2 130.7 141.9 182.4 214.3
margin 9.8% 6.7% 9.5% 10.5% 12.2% 13.0%
EPS (Diluted) 10.17 7.42 13.25 14.38 18.48 21.71
Source: Company data, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Balance Sheet (in Rs Crs.)
2007 2008 2009 2010E 2011E 2012E
Sources of Funds
Share capital 49.3 49.3 49.3 49.3 49.3 49.3
Reserves 552.3 608.2 723.3 833.2 983.5 1,165.7
Share Holders Funds 601.5 657.5 772.7 882.5 1,032.8 1,215.0
Secured Loans 1.3 0.8 0.4 0.2 0.2 0.2
Deferred Tax Liability 0.5 6.9 6.7 6.7 6.7 6.7
Total Liabilities and Equity 603.3 665.2 779.7 889.4 1,039.7 1,221.8

Application Of Funds
Gross Fixed Assets 413.1 466.7 528.4 615.4 675.4 740.4
Less:Depreciation 218.6 258.3 313.7 366.0 423.4 484.2
Net Fixed Assets 194.5 208.4 214.6 249.3 251.9 256.2
Capital WIP 28.6 5.0 1.1 0.0 0.0 0.0
Investments 41.2 18.7 9.6 9.6 9.6 9.6
Goodwill 0.0 0.0 19.9 19.9 19.9 19.9
Deferred Tax Assets 0.2 7.9 9.7 9.7 9.7 9.7
Curent Assets, Loans & Advances
Cash 93.0 155.1 340.1 418.0 550.1 708.7
Receivables 180.1 210.5 203.1 179.6 207.9 228.7
Accrued Revenues 143.5 151.3 142.2 168.4 179.6 197.6
Loans and Advances 75.1 93.2 90.3 93.5 104.0 109.8
Total Current Assets 491.7 610.0 775.7 859.5 1,041.6 1,244.8
Current Liabilities & Provisions
Creditors 103.9 134.9 160.3 159.3 178.9 195.5
Provisions 45.8 44.7 46.6 53.8 66.4 72.8
Others 3.3 5.1 44.0 45.5 47.7 50.0
Total Curr.Liabs & Provisions 152.9 184.8 250.9 258.6 293.0 318.3

Net Current Assets 338.8 425.2 524.8 600.9 748.6 926.5

Total Assets 603.3 665.2 779.7 889.4 1,039.7 1,221.8

Source: Company data, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Cash Flow Statement (in Rs Crs.)
Cash Flow 2007 2008 2009 2010E 2011E 2012E
Profit Before Tax 121.0 89.3 151.6 169.2 222.2 261.1
Plus Depreciation 48.1 46.0 50.5 52.3 57.4 60.7
Deferred Tax 0.0 0.0 0.0 0.0 0.0 0.0
Interest & Dividend Income (3.1) (4.4) (11.2) (15.7) (19.2) (25.2)
Interest Expenses
Net Income/Loss of fixed assets/doubtful debts/written
(0.0) offs 1.8 (3.7) 0.0 0.0 0.0
Dec/Inc in A/R (45.3) (27.3) 35.7 23.5 (28.3) (20.8)
Dec/Inc in Loans and advances (69.4) (20.0) 9.2 (29.4) (21.7) (23.8)
Increase (Decrease) in current liabilities and
provision 23.5 27.7 47.3 7.7 34.4 25.4
Others 1.9 (2.6) (7.6) 0.0 0.0 0.0
Total Tax paid (22.3) (24.5) (30.1) (27.3) (39.8) (46.8)
Cash Flow from Operations (a) 54.4 86.2 241.7 180.3 204.9 230.6
Capital expenditure (35.6) (39.0) (26.0) (85.9) (60.0) (65.0)
Proceeds from Asset Sales & Other 1.8 1.3 0.6 0.0 0.0 0.0
Chg in investments (4.0) 0.0 23.1 0.0 0.0 0.0
Chg in associates (1.7) (1.9) 0.0 0.0 0.0 0.0
Interest & Other Received 3.1 4.4 11.2 15.7 19.2 25.2
Acquisition of subsidy 0.0 0.0 (37.0) 0.0 0.0 0.0
Cash Flow from investing (b) (36.5) (35.1) (28.2) (70.1) (40.8) (39.8)
Proceeds from exercise of stock options 0.1 0.0 0.0 0.0 0.0 0.0
Proceeds from premium on exercise of stock options 3.4 0.7 0.0 0.0 0.0 0.0
Proceeds / (Repayment) of secured loans (2.1) (0.5) (0.5) (0.2) 0.0 0.0
Lease finance charges (0.2) (0.1) (0.1) 0.0 0.0 0.0
Dividends paid (incl dividend tax) (26.8) (12.4) (34.4) (32.1) (32.1) (32.1)
Cash Flow from Financing (25.6) (12.1) (34.9) (32.3) (32.1) (32.1)
Effect of exchange rates (0.8) (1.1) 6.4 0.0 0.0 0.0

Net Cash Flow (8.5) 37.8 185.0 77.9 132.1 158.7

Beginning Cash Balance 101.5 117.2 155.0 340.1 418.0 550.1

Ending Cash Balance 93.0 155.0 340.1 418.0 550.1 708.7

Source: Company data, Nirmal Bang Research
Initiating Coverage Polaris Software Laboratories Ltd
Ratios
Profitability Ratios FY 08 FY 09 FY 10 E FY 11 E FY 12 E
Gross Margin 32.3% 35.7% 35.5% 35.8% 36.2%
EBITDA 10.8% 16.9% 16.9% 17.4% 18.0%
PAT 6.7% 9.5% 10.5% 12.2% 13.0%
RoNW 11.1% 16.9% 16.1% 17.7% 17.6%

Growth Ratios
Sales 6.5% 25.3% -2.2% 11.1% 10.0%
EBITDA -26.7% 97.6% -2.5% 14.3% 13.9%
PAT -27.6% 78.5% 8.6% 28.5% 17.5%

Valuation Ratios
PE 23.87 13.37 12.32 9.58 8.16
P/BV 2.66 2.26 1.98 1.69 1.44
EV/EBIDTA 13.52 6.03 5.84 4.60 3.51
M.Cap/Sales 1.59 1.27 1.30 1.17 1.06

Per Share Data

BV 66.45 78.29 89.42 104.65 123.10
EPS 10.17 7.42 13.25 14.38 18.48
Cash EPS 17.56 35.43 43.32 56.70 72.78
Source: Company data, Nirmal Bang Research
 Initiating Coverage Polaris Software Laboratories Ltd

Note

Disclaimer
This Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates
contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is
meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the
contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or
omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang
Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or
its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this
document.