IPO line- Polaris Software Labs Ltd (Polaris)
• 4.4mn shares of Rs10 each, available for public at a premium of Rs200 per share aggregating to Rs 916.8 mn.
• Public holding and promoter holding at 25% and 47% of the post issue capital respectively
• Listing at Mumbai and Chennai stock exchange.
• Post issue number of shares 17.1mn.
Lead Managers: Kotak Mahindra Capital Company
Issue Open: 4th August, 1999
Issue Close: 10th August, 1999
Background
Polaris, a Chennai based software company, was incorporated as a private limited company on Jan'93. The company has two SDCs in South India and one at NOIDA. Its first development center was located at Chennai with a capacity of 25 people. In 1996, the new SDC at NOIDA came up and in 1998, the company created additional facilities at both NOIDA and Chennai. The company has regional marketing offices at Bangalore, Hyderabad and Chennai and international marketing offices (subsidiaries) in the US, UK and Singapore. The company currently has a strength of 725 employees with nearly 85% (620 noose) in software development and the rest in resource group and support staff. The company has an excellent track record of growth with export revenues doubling every year and profits multiplying by nearly 15 times since FY95.
Promoters
Arun Jain (currently the CMD), a first generation technocrat, promoted the company. He is an Electronics engineer from the Delhi University and has an experience of nearly 16 years in various activities including software development, project management, creation of strategic alliances, business development, and strategic planning. The promoter has previously set up two software development organizations viz Interactive Information Systems (1983-1987) and International Information Systems (1986-1993) both of which are currently dormant.
Business
The company's business can be broadly divided into 5 categories viz software development, migration and re-engineering services, maintenance, product enhancement and ERP. Also the company has divided its various activities into 7 SBUs in order to focus and achieve high growth rates. The seven SBUs of the company are:
SBU 1 – Banking and financial application software
SBU 2 – Investment banking, transportation and Baan
SBU 3 – Trading and risk management software for the finance industry
SBU 4 – Enterprise knowledge management and telecom
SBU 5 – Migration, maintenance and re-engineering services, testing & validation and insurance
SBU 6 – ERP solutions
SBU 7 – Component based solutions, e-commerce.
Polaris has developed an expertise to provide software services mainly to the banking/ financial services, retail and the transportation segment.
Application (software) development (38.5%)
Software development involves customizing the client's IT requirements for various functional requirements. The various industries, which the company has targeted, include banking, financial services, investment banking, insurance and transportation. Globally, the banking, financial services and insurance industry accounts for the largest IT budgets with a market size of $58.5bn out of the total of $266bn during 1997 (source: IDC). The company has developed considerable skills in the above mentioned industries and has plans to enter the insurance sector which has so far been neglected by the company.
Migration and reengineering (21%)
Migration fulfills the needs for upgrading to the fast changing technology environment. The process involves shifting over from the current platform to a new one with a view to increase productivity and save overall costs. The company is involved in migration projects from the current legacy platform to a component based web-enabled, e-commerce ready environment.
Reengineering mainly involves changing over from the current architecture and interface to a newer one, given the rapid change in technology requirements. The process involves overhauling existing software product or application and keep it in tune with changing market trends.
Maintenance (25%)
The company's maintenance for its own software products to various clients forms a significant part of the company's income. Maintenance is required to change or upgrade the solution provided by the company, which were created with certain initial specifications that may be need changes. Since the company has already worked on the project it will be both easier and cost effective for the client to outsource it.
Product Enhancement (11%)
Globally, software products account for a significant portion of the software industry. However, Indian companies have more or less been unsuccessful in making any significant contribution to this segment as it requires tremendous marketing efforts and is also characterized by short product life cycle. However, the company has tried to create products in areas where it has considerable domain expertise.
The company's products include Super Store XS, a product for the retailers which controls the entire information flow from the point of purchase/ production upto the point of delivery to the customer. Parsely, a web based query logging and resolution system. INSPIRE is another product which handles the software development cycle with a view to integrate business and development aspects of a software project. Nterprise, an ERP product designed by the company for the small and medium enterprise for integrating areas such as purchase, inventory, distribution, sales, accounts payable, accounts receivable, financial accounting and personnel and payroll.
Enterprise Resource Planning (4.5%)
The company also implements ERP packages for SAP R/3, Baan and Oracle Applications with modifications to meet customer requirements.
Risk factors: Significant part of the company's revenues come from Citibank, leading to client concentration risk.
Future plans
Polaris plans to two new development centers at South India and one at NOIDA. The SDC at NOIDA will have a capacity of 320 employees and that in Navaloor (near Chennai) will have a capacity of 850 employees. The location for the third SDC at South India has not yet been finalized. Polaris also plans two new SDCs at US and Europe. Also to propel its exports business the company plans to open four new international branches.
Key financials (Rs mn)
Key financials FY98 % chg FY99 % chg FY00E % chg
Total income 311.3 105.1 605.4 94.5 1,165.0 92.4
Total expenses (256.3) 121.7 (443.8) 73.2 (865.4) 95.0
operating profit 55.0 51.9 161.6 193.8 299.6 85.4
Interest (2.7) 1,250.0 (3.9) 44.4 (4.5) 15.4
Depreciation (4.7) 370.0 (11.1) 136.2 (39.7) 257.7
Tax (0.6) 500.0 (0.1) (83.3) (2.6)2,500.0
PAT 47.0 34.7 146.5 211.7 252.8 72.6
Equity - - 17.1 - 17.1 -
EPS - - 8.6 - 14.8 -
P/E - - 24.5 - 14.2 -
(Source :Probity)
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