Rally in Polaris has more legs: Analysts

Analysts say that separate products and service divisions will mean better business focus and help improve stock valuations going ahead

The Polaris Financial Technology scrip surged 20 per cent on Wednesday to Rs 183.35 (also its two-year high), adding to the 12 per cent rise a day earlier, in response to the company’s business reorganisation plan. Polaris announced on Tuesday that it plans to demerge its products business (about 23 per cent of revenues and 25 per cent of operating earnings) into a separate entity. The move, aimed at enhancing focus of the products and services businesses, which are pretty different in terms of investments, sales and services, should also help unlock value for all stakeholders, say analysts.

“We lost momentum in services business because we could not tie-up with global product companies due to our product business and conflict of interests. Investors, too, were unable to predict the company’s financials accurately, given the volatile nature of the products business. There was an interlock at the employees’ end as well. The demerger will iron out these issues and enable both businesses to grow strongly,” said S Swaminathan, chief financial officer of the company, in an investor call on Wednesday.

Analysts say separate products and service divisions will mean better business focus and help improve stock valuations. Valuations are not demanding either, at about seven times FY15 estimated earnings. Of 10 analysts polled by Bloomberg, six have a ‘Buy’, and two each have a ‘Sell’ and ‘Hold’ rating on Polaris. Notwithstanding the recent rally, analysts believe the de-merger will unlock value, leading to further gains at the counter.

Nitin Padmanabhan, technology analyst at Espirito Santo Securities, says, “The demerger is good for the company. So far, market was giving negligible value to the product business and there is potential for value unlocking. We believe the products business will be a cash-burn business in the near-term, given the investments required in the business. A good thing is this business has picked up over the past couple of quarters.”

But, client concentration remains a key concern for the services business. Overall, we believe there is still some steam left in the stock. The focus now will shift on how both the businesses perform, he adds.

Meanwhile, in sync with the weak demand environment, Polaris has been struggling to grow its services business and has been losing out to stiff competition from its peers, as well as rising pricing pressures. After restructuring, which began three quarters ago, and now the demerger, things should hopefully look up.

The product company will be known as Intellect Design Arena (Intellect) and will comprise four businesses, namely, global universal banking; risk and treasury management; global transaction banking, and insurance. The company plans to double its investment in Intellect (selling and marketing activities) to $40 million in FY15, which could have a bearing on its Ebitda margin, according to the management.

However, funding should not be an issue. “Both businesses will be funded as required. We expect the whole (demerger) process to be completed over the next six to eight months,” added Swaminathan.

The company currently has Rs 570 crore cash in its books.

According to the scheme, every shareholder of Polaris will receive an equal number of shares of Intellect. Shareholders of Intellect are also being given an option to exchange the shares with fully secured non-convertible debentures having a face value of Rs 42, with an annual coupon of 7.75 per cent, redeemable at par after 90 days. This will provide an exit route for those averse to the risk of the volatile product business.