Back From The Brink

In an industry where 30 per cent net profit margins are pretty much the norm-at least amongst the first tier of Indian it services firms-a margin of 2.6 per cent at the net level is difficult to reconcile with. That explains to a large extent why the stock of Polaris Software Labs has been treated with disdain for the past three-four years, during which the stock price hit an all-time low of Rs 51.8 in June 2006. But just when industry pundits and analysts were poised to give up on Polaris, the company has begun showing signs of a revival. After a miserable 2005-06, when the company posted revenues of Rs 825 crore and a profit after tax (pat) of Rs 21.3 crore-as against a pat of Rs 58 crore in the previous year-the Chennai-headquartered company has bounced back in the current fiscal with revenues for the nine-month period ended December 2006 of Rs 761.59 crore and net profits of Rs 79.6 crore. That's a net margin of 10.5 per cent-still not up there with the best, but a huge improvement nevertheless. By the close of the year, the company is confident of crossing Rs 1,000 crore in turnover and Rs 100 crore in net profit. The stock markets have been quick to sense a turnaround, with the scrip galloping a little over four-fold since last June.

Polaris' problem has always been profitability, right from when the Citigroup company OrbiTech was merged into it in 2002-03. Revenues got a huge leg-up no doubt (from Rs 293 crore to Rs 431 crore post-merger), but pat margins were confined to single digits. Arun Jain, Chairman & CEO, Polaris, has an explanation for the bottom line woes. "Our investments peaked in 2005-06. Companies in the growth phase do have one bad year when they invest for growth. I have always believed in the product and services combination model for a mid-cap company like Polaris-it takes time but that is the only way we can hold our own against the biggies," he says.

The Polaris top brass feels that strategy is getting validated. "At best there has been a delay of a couple of years when we made mistakes, which have only made us wiser,'' says Ashok Korwar, a long time management consultant and advisor to Polaris. Prior to the acquisition of OrbiTech, Polaris was having difficulty selling its banking expertise overseas; its credentials of having developed robust products for Citibank were clearly inadequate. Clients raised issues of intellectual property rights (IPR). The Polaris management thought that by acquiring IPRs through OrbiTech it could fix that problem.

But that wasn't the only issue clients had. Many of them did not want the 'monolithic product platform' that Polaris offered-which may be modern and even futuristic but entailed shutting down banking operations during implementation. By 2003-04, Polaris had learnt its lessons and changes were made in the product to make it flexible enough to sit on any existing platform. This way banks could implement modules they desired without any major hiccup in operations. But the reorientation, the branding of the new product from Orbisuite to Intellect and, finally the selling, took time.

"We had to make massive investments, of at least Rs 100 crore just for products post merger, but for 2005-06 we did not capitalise product expenses. If we did not follow conservative accounting practices, we would have shown a better bottom line," says Jain. Currently, the core team that works on product development consists of 150-the remaining 650 have been shifted to product implementation, maintenance and support onsite.

By 2005-06 Polaris, as one company official puts it, had a lot of things to sell but not enough feet to do the selling. Enter Arup Gupta from TCS as Chief Operating Officer. His immediate priority was to streamline operations. Marketing, sales, delivery were integrated. "We are doing top-end work with 11 of the top 25 banks globally and 11 more are talking to us," says Jain. Adds Gupta: "The average size of a deal has now grown from $1 million (Rs 4.5 crore) to $5 million (Rs 22.5 crore) and we will be taking this to $10 million (Rs 45 crore) in 12-18 months.''

A recent J.P. Morgan report says: "Polaris is our top pick in the mid-cap India it space." However, as the gap between the Tier-I and Tier-II of Indian it services keeps widening every quarter, Polaris has to scale up fast-and profitably.