>POLARIS SOFTWARE (JP MORGAN)

A leveraged play to the recovery in financial services IT spending

• Initiate coverage with OW and Jun-10 P/E-based price target of Rs225; 50% upside: Polaris is one of the most leveraged plays in the Indian IT sector to the recovery of the global banking, financial services and insurance industries (BFSI), with 90% of its revenue from this segment. With Citibank already an anchor client and investor, we believe the global recovery is leading to good business traction at Polaris. We expect this traction to drive a 26% EPS CAGR over FY10- 12, leading to a gradual stock re-rating, driving our positive view.

• The global financial sector recovery is driving increased spending on technology after a big freeze at the end of 2008/beginning of 2009. Several large Indian IT companies have seen more deal closures from BFSI companies worldwide, and we believe that the mid-cap sector is beginning to see positive momentum now. We expect Polaris to benefit from this, given its significant expertise in the BFSI sector.

• Customer traction on the ground: Citibank is Polaris’ largest customer, contributing 40% of revenue and having a 40.6% stake in the company. As expected, Polaris saw a decline in Citibank business over the past two quarters. However, business from Citibank has bottomed out, according to management, and is now growing. Furthermore, Polaris has seen several new project wins, both from existing and new customers (such as HSBC and RBS), and these are
likely to slowly ramp up over the next 6-12 months.

• Valuation, price target and risks: We estimate a gradual revenue acceleration leading to double-digit top-line growth in FY11/FY12 when the full impact of ramp-ups shows in numbers. Operating leverage combined with the elimination of hedging losses should drive a good 26% EPS CAGR in FY10-12E, after 13% growth in FY10E. Our PT of Rs225 is based on 11x forward P/E, at a 10-20% discount to other mid-caps in the sector due to its high sector focus. Risks to our
view and PT include high client concentration, and a deterioration in the global financial services sector outlook.

To see the full report: POLARIS SOFTWARE