>POLARIS SOFTWARE LIMITED (CRISIL)

Polaris Software (Polaris) is an end-to-end global financial technology company with a
comprehensive suite of products and services for the BFSI sector.

■ Improved outlook for the IT sector
The outlook for global IT spend has improved since the latter part of 2009, after a brief phase of
weak demand outlook. Consequently, the outlook for Indian IT vendors has also improved which
has prompted them to set a high recruitment target for FY11. The BFSI (banking, financial
services and insurance) sector is globally the largest spender on IT. Demand improvement in
the US – largest target market – bodes well for financial technology vendors like Polaris.

■ Polaris has evolved as an end-to-end global financial technology company
Through the acquisition of Orbitech, a Citibank subsidiary, in 2002 Polaris got access to 56
software modules for the banking industry. Polaris has transformed these modules into serviceoriented- architecture (SOA). Aided by acquisitions in the insurance and India-focused banking products space, Polaris has evolved as an end-to-end global financial technology company.

■ IT products business at an inflection point
Over the past few years, Polaris has been in the process of transforming banking products into
SOA, broadening its products portfolio and building customer references. It is now at an
inflection point in its products business wherein it can capitalise from its investments made in
software development. In FY10 Polaris won 54 deals in products business as against 21 deals
each in FY08 and FY09. We forecast a CAGR of 25% in US dollar terms (21% in rupee terms)
over FY10-13 for the IT products segment and expect its revenue contribution to increase to
25% in FY13 from 20% in FY10.

■ Increasing contribution from IT products to drive margin expansion
We forecast total revenues to grow to Rs 19.3 bn in FY13 from Rs 13.5 bn in FY10 at a CAGR
of 12.4% (16.2% in US dollar terms). We expect Polaris’ EBITDA margin to increase to 19.3% in
FY13 from 16.5% in FY10 on account of: (a) increasing revenue contribution from IT products;
(b) IT products’ margins expansion to 29% from 23% currently on account of increasing
operating leverage; and (c) broadening of the employee pyramid.

■ Net profit to grow at a CAGR of 22.2% over FY10-13
After considering the impact of higher tax rates and forex gains from hedges ($170mn hedges at
Rs 48), we forecast net profit to increase from Rs 1.5 bn in FY10 to Rs 2.8 bn in FY13. We also
expect the RoE to increase to 20.2% in FY13 from 18.6% in FY10. The company has a strong
cash balance which we expect will touch Rs 10 bn in FY13, which could be used for acquisitions
aimed at client acquisition and access to intellectual property rights.

■ We assign 4/5 on fundamentals and 5/5 on valuations
Polaris’ fundamental grade of 4/5 indicates that its fundamentals are superior relative to other
listed securities in India. The grading factors in experienced management, a strong IT products
portfolio, balance sheet strength and improved outlook for the IT sector. The grading has been
tempered by dependence on the BFSI sector and high client concentration. The valuation grade
of 5/5 indicates that the current market price has strong upside to our fundamental value per
share of Rs 247.

Key stock statistics

• Fundamental value : (Rs) 247
• Current market price : (Rs, as on April 21) 186
• Shares outstanding (mn, face value : Rs 5) 99
• Market cap (Rs mn) : 18,407
• Enterprise value (Rs mn) : 13,319
• 52-week range (Rs)(H/L) : 204/60
• PE on EPS estimate (FY11E)(x) : 7.7
• Beta : 1.16
• Free float (%) : 41.1%
• Average daily volumes (last 12 months) : 1,998,306

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