Polaris - Value Punt - by Manufactured Luck blog

Abhinav and Niren have published an excellent post on Polaris. Read complete post from herehttp://manufacturedluck.blogspot.in/2013/06/polaris-good-value-punt.html. In simple words the investment theme is investing in a stock which typically satisfies all the parameters of value stock and in addition currently in play on because of RUMOURS of sale of its service division which accounts for nearly 70% of its overall revenue. There can be debate whether to invest or not, but I think one should atleast ANALYSE SUCH INVESTMENT OPPORTUNITY, TO EXPLORE NEW WAYS TO SELECT STOCKS.

Here is a brief mindmap on Polarishttp://app.wisemapping.com/c/maps/128070/public

Here some of thescenarioI could think of :http://app.wisemapping.com/c/maps/130537/public

A question may arise as why not Mphasis, which also is in play because of rumours of sale. Unlike Polaris, here the sale is of entire stake, which will trigger open offer whereas in Polaris there is a probability that MINORITY SHAREHOLDERS may be rewarded and entire proceeds PISS OFF in UNRELATED DIVERSIFICATION. The simple answer is valuation is not as cheap as in Polaris and in case of Mphasis, business from HP appears to be on secular decline for some more years unlike Citibank where business is stable to moderate growth. see the mind map herehttp://app.wisemapping.com/c/maps/129409/public

Views invited…

Hello Anil

I have been in a similar boat with Polaris for the last 9 months - took a look in January when the stock fell and they looked at doing something with Services business. Given that the stock has moved some but no real clarity on what is happening with Services business, how are you looking at the situation now?


Highlights of the call by Capital Mkt:

The Consolidated net Sales grew by 9.6% YoY to Rs 614.24 crore for the quarter ended December 2013 and PAT grew by 27% YoY to Rs 51 crore for the same period.

The Revenues from the Services business grew by 12% YoY to Rs 497 crore for the quarter ended December 2013. The EBITDA Margin stood at 18% and posted an EBIDTA of Rs 89 crore during the quarter. The profit stood at Rs 80 crore for the same period.

The focus in Q3 in Services businesses is to clean up the bunch of low margin projects that reflected during the quarter.

In Services business, it has 155 Active Clients and added 2 new clients during the quarter.

In Services business, The Capacity utilizations in the Service business is at 81.6% in Q3’FY14 compared to 82.6% in Q3’FY13. The onsite and offshore ratio is at 21% to 79% during the quarter.

On Services business, it indicated that restructuring work is going on, focusing on efficiency and operating leverage and still its work in progress going forward.

The Revenues from the Product business grew by 30% YoY (5% QoQ) to Rs 146 crore for the quarter ended December 2013. The EBITDA grows to Rs 32 crore in Q3’FY 14 from Rs 8 crore in Q3’FY 13.

The product business won 8 new clients during the quarter. There is Strong acceptance of Intellect product suite in advanced markets.

The 44% of business of the product business is Support & Maintenance is the steady in nature.

It expects to grow above the Industry growth in the product business going forward.

In the product business, it wants to maintain operating margins in the 50-55% range.

There are Consistent investments in R&D yielding results in the product business.

The total Employees is 12297 -7000+ services and 2700 in products business and 1590 in the BPO business as on 31stDecember 2013.

The Cash and cash equivalents stood at Rs 569 crore at the end of the quarter, moving up from Rs 480 crore in the same quarter last year.

Highlights of the call by Capital mkt:

The Revenues declined by 7% QoQ (up by 6% YoY) to Rs 600 crore for the quarter ended June 2014. The EBITDA stands at Rs 78 crore and Net Profit at Rs 38 crore during the quarter.The Revenue from the Services business fell by 20% QoQ to Rs 455 crore (75.9% of Sales) for the quarter ended June 2014.

The Revenues from the Intellect business grew by 11% QoQ (24% YoY) to Rs 145 crore for the quarter ended June 2014 and EBIDTA grew by 7% QoQ to Rs 17 crore for the same period.It added 17 new clients (12 Intellect Deal wins and 5 Services client wins) in Q1 FY15.The Top 5 accounts contribute 45.13% of revenues and Top -10 contributes 55% of revenues during the quarter.The Head count stands at 11,783 as of 30th June 2014.

The ADM and testing continue to be the main stay but also wants expand into the Infrastructure Services and the BPO going forward.

The TCV of the deals won during the quarter are USD 35 million and executable over 18 months.The steps such as demerging the Company, restructuring are fundamentally designed to achieve the consistency going forward and believes it is on the right track.

The license revenue for the product business looks positive.It indicated that it will take at least two quarters for margins to reach comfortable level.

The Cash and Cash equivalent stood at Rs 660 crore as on 30thJune 2014.

The DSO stands at 51 Days (59 Days in Q1FY14). Further, The Services business DSO stands at 41 days and Intellect business DSO improved to82 days (90 days in Q4 14).

The hedge amount for the next three quarters for Services business are at USD 71 million at Rs 61.05 and another USD 100 million for the next year at Rs 70.79. For the Product business next 3 quarters it has hedged USD 15 million at Rs 63.60 and next year 20 million 67.59.

It is very good to see the significant hedge amount at a much higher exchange rate. This should become a tail wind in 2015 vs a headwind in 2014. How do you get the detailed hedges that they have done?

Given the spin-off of Intellect division and company valuing it at around 40/share i.e. around 400 Crores, do you have any view on its valuation? It seems to me that for a product co valuing it as <1 X Revenue is undervaluation.

There is recent news about Virtusa acquisition of Polaris and subsequent Open Offer where the offer price of around 220 is not much attractive compared to CMP of about 205. There have been past instances with other acquisitions where share prices have raced up with Open Offers but in the case of Polaris it doesn’t seem to be so.

Request experienced members to throw some light on this point.

I’m a new investor. Apologies in advance for probably raising a silly point. And Thanks in advance for helping newcomers learn. Valuepickr is an amazing forum.

How good is the Polaris Consulting OFS at CMP 130. Will the company’s ROE improve in the years to come ?