Polaris: Short-term Hiccup But Good Long-term Prospects

Polaris Financial Technology (Polaris) announced its Q3FY13 results post market hours yesterday (Jan 22). The market seemed to have estimated the outcome of this announcement. Stock prices of Polaris fell by 9.25% yesterday to Rs 128.55 per share. Results were in line with the directional movement in share prices observed ahead of the results.

In Q3FY13, revenues for Polaris declined by 3.76% to USD 105.8 million sequentially. With this decline came heavy downward pressure on margins. The EBITDA margin and net profit margin of Polaris dropped sequentially by 333 basis points and 223 basis points respectively.

Polaris that serves the Banking, Financial Services and Insurance verticals faced major hurdles during the quarter. Hurricane Sandy affected the east coast and caused delays in execution. This had an obvious effect on the financials of Polaris as the east coast is flooded with financial institutions that had to collectively face the after-effects of the calamity. It gets 76.50% of its revenues from FT (Financial Technology) Sourcing (services) and 22.30% from FT Intellect (products), and the minimal rest from BPO.

FT Sourcing had revenues declining by 0.36%. Revenues from the Americas, making up for more than 50% of the services revenues declined by 7.50% thus lagging on the overall results. Application maintenance too weighed on because of a decline of 10.61% sequentially.

At the same time, FT Intellect was very subdued. The segment’s revenues declined by a hefty 14.32% sequentially. Licensing revenues weighed on the performance of FT Intellect as they declined by 45.22% sequentially. There was considerable weakness seen in its cloud business as well. This offering had revenues growing by 5.86%. However, it operated at an EBITDA margin of -50.1% and a net profit margin of -67%.

Polaris had acquired 85% stake in San Francisco based IdenTrust Inc, a digital identity authentication service provider. This acquisition has been facing issues as the US government has raised security concerns due to the nature of the company’s operations. The business is classified by the Committee for Foreign Investments in US (CFIUS) as critical to its security infrastructure. Polaris had launched its FT Grid in collaboration with IBM and IdenTrust. This company made a loss of Rs 12 crore in this quarter. Owing to pressures from the US government, Polaris has decided to divest its stake in this business and is looking for prospective buyers. At the same time, this space remains important to it and it will continue to look for prospective investments.

On the operational front, the headcount saw a reduction of 134 bringing the total number of employees to 13114. Attrition rates saw a reduction to 17.90% and utilisation levels remained above 80% at 80.10%.

Although the result has been subdued, Polaris has a robust product/service offering that focuses on a specialised vertical. Moreover, it is looking at making continued investments in high growth areas. We thus are optimistic about the long term prospects of the company although there has been a hiccup in this quarter.