Acquisition Synergy with Virtusa is playing out for Polaris Consulting & Services Ltd
Founded in 1993, Polaris Consulting & Services Ltd. (PCSL) is a global leader in Financial Technology (Fintech) for Banking, Insurance, and other Financial Services. Polaris is an expert in digital transformation with over 25 years of experience and more than 300 clients across the globe. The company has the scale and intellectual capital to tackle programs of any size, yet approach small projects with the care and enthusiasm of a boutique firm. It has a presence in 30 geographies with team strength of over 7600. Virtusa Corporation in March/April 2016 acquired a majority stake in PCSL.
The acquisition of PCSL by Virtusa has opened up significant opportunities for the company. It can now offer end-to-end solutions in BFSI industry resulting in more clients, service offerings and digitization related projects. Post the acquisition PCSL has restructured its clients and eliminated low margin clients leading to effective utilization of its resources. Increasing trend of outsourcing in the financial industry and bright prospects in big data analytics industry would be key growth driver for PCSL in the near term.
Polaris business model is currently based on Digital Transformation i.e. to optimize big data for decision making purpose.
- Polaris’ Digital Enterprise 360 approach is an ‘Assess–Adopt–Grow’ strategy with roadmaps to transform Customer Experience, Operation & Technology Processes and build disruptive Business Models through a continuous innovation culture
- Digital OUT: This focuses on customer experience, transformation and brand value creation, via all customer touch points across organization channel, LOB (line of business), brands / product and services. It helps organizations maintain a Unified Digital Channel Experience for all its products and services across brands
- Digital IN: This focuses on maintaining a balancing act between Operational Efficiency and Technology adoption essential for achieving Superior Customer Experience
- Connected Ecosystem: A key technology area essential in building the connecting link between Business and Operations for seamless collaboration
- Enabling Ecosystem: This focuses on enabling Rapid Transformation through continuous Innovation, ready-to-use technology accelerators and strong Agile program governance with Development operations
Synergy with Virtusa is playing out:
Virtusa was dealing with the retail and consumer side of banking, while Polaris was on the corporate and investment side. The acquisition of Polaris by Virtusa provides a synergy as the combined firm would create a strong go-to-market in banking. The acquisition of Polaris has greatly expanded the depth and breadth of Virtusa’s capabilities and domain expertise and established a leadership position in the BFSI industry of delivering end-to-end transformational solutions across an entire organization expanding retail banking, corporate banking, capital markets, payments and governance risk and compliance. It has significantly expanded its addressable market and strengthened its ability to win large transformational programs. Also it would mean a wider platform for PCSL to utilize its skills in emerging technologies like mobile banking and payments bank. Virtusa had set a target of $100 mn of synergy revenue by FY19. With two-third of its staff in India, Virtusa-Polaris is expecting to add around 1,300-1,700 employees a year.
Post the acquisition by Virtusa, the combined entity can offer end-to-end solutions in BFSI industry. As a result of the acquisition, the company had to incur some integration expenses throughout FY17. These one-off expenses are unlikely to recur in FY18 resulting in better margins. The same can be observed from the last two quarters performance of PCSL.
For the H1FY18 the revenues have grown by 21.7% yoy and for Q2FY18, the growth came in at 31.8% yoy. The EBITDA has improved significantly for Q2FY18 by growing at 75.8% yoy and for H1FY18, the EBITDA growth stood at 29.9%. The EBITDA margin has improved from 12% in H1FY17 to 12.8% in H1FY18. The EBITDA margin in Q2FY18 stood at 16.2% as against 12.1% in Q2FY17. The PAT for H1FY18 has increased by 26.3% from Rs.81cr in H1FY17 to Rs.102.5cr in H1FY18. The improvement in profitability was driven by combination of factors such as strong revenue growth, improvement in utilization levels, benefits from investments in prior quarters and cost rationalization initiatives. DSO improved by 13 days to 74 days compared to the last quarter driven by initiatives undertaken to streamline internal processes.
PCSL has a significant amount of cash and liquid investments on its balance sheet. At the end of H1FY18 cash and liquid investments amounted to Rs 64/share. The company does not have any significant capex plans in the near future. Taking into account the strong earning potential and assuming no dividend going forward we expect cash per share to increase to Rs 95.9 per share by FY19E.
Huge opportunity in big data analytics industry
“Big Data” simple refers to the use of predictive analysis, user behavior analytics, etc. to examine large amounts of data to uncover hidden patterns, correlations and other insights. This analytics helps organizations and companies harness their data and use it to identify new opportunities, enabling them to develop smarter business strategies, efficient operations, and increase financial returns and customer centricity. The big data and analytics industry is witnessing a rapid growth driven by increased demand for cloud based and predictive analytics solutions by industries such as BFSI, retail, telecom and healthcare.
According to NASSCOM big data analytics sector in India is expected to witness eight-fold growth to reach $16 bn by 2025 from $2 bn in 2016. The analytical firms are positioning India as an emerging hub for analytics solutions across the globe and India is expected to have a 32% share in the global market by 2025. Polaris in partnership with some of the leading firms in data management has developed tools to aggregate data from hundreds of discreet sources which can be used to drive new revenue, improve operations, or eliminate risks from existing business. Executives can design their own dashboard giving them 360° customer insight for new product and service sales.
Increasing trend of outsourcing in the financial industry
Facing increasingly stringent financial regulations, cost reduction and the urgent need to modernize the technology used, firms have been compelled to move beyond their largely traditional functionality and look for ways to advance and customize their services. IT outsourcing has emerged to be an effective tool to mitigate these challenges. As per the IT Key Metrics Data 2015 by a leading American information technology research and advisory firm, IT outsourcing spend accounts for 18% of the total IT spend in the banking and financial services industry globally. In the insurance industry, this proportion is 20%. Since many of the financial operations are repetitive and data-driven, it is easy to streamline them using technology. With respect to these, IT outsourcing for a financial services firm can work effectively to get the job done for at much lower costs and faster rate.
We believe that increasing trend of outsourcing in the financial industry and bright prospects in big data analytics industry would be key growth driver for PCSL in the near term. We feel investors could buy the stock at the CMP and add on dips in Rs 280-300 band (16x TTM P/E) for the target of Rs.600 in next 3 to 4 quarters.