Investors with a one-two year horizon can buy the shares of Polaris Software Labs, a company that delivers products and services largely to the BFSI segment.

A changing business-mix in favour of high-margin products, a higher offshore component and strong deal pipeline are key positives for the stock. Polaris is also witnessing a ramp up in projects from its top clients suggesting strong execution capabilities.

At Rs 126, the share trades at just five times its likely FY12 per share earnings. This is at a discount to most mid-tier IT companies.

In FY11, Polaris' revenues increased by 17.2 per cent over the previous fiscal to Rs 1,586.3 crore, while net profits expanded by 32.5 per cent to Rs 202.5 crore. In the recent September quarter too, the growth momentum has sustained with revenues rising 31.3 per cent over the same period in FY11 and net profit increasing by 12 per cent. The lower profit growth was due to annual salary hikes given during the quarter.

Polaris is witnessing increasing contribution to revenues from its software product offering, which accounts for 27 per cent of revenues, up from 21 per cent last year. The rising contribution from products augurs well for margins, especially with this high-margin business witnessing strong traction. The company reported 12 new deal wins in the September quarter.

Despite entrenched software product players such as Infosys (Finacle), TCS (BaNCS) and Oracle Financial (FLEXCUBE), being in the market, Polaris has managed to thrive and grow its product Intellect, offering at a faster pace than some of these companies. The company continues to execute large projects such as the recent $55-million deal recently won from the RBI, where it is implementing core banking solutions.

Despite the economic slowdown in the developed markets, BFSI as a segment has not witnessed any cutback even in discretionary spends, much less on normal business efficiency related projects. Most top-tier and several mid-tier companies have seen BFSI clients ramp up contribution, suggesting that the macro environment continues to be reasonably sound.

Polaris' top 10 customers have steadily ramped up contribution to revenues to 56.7 per cent, suggesting robust client mining abilities. The company has optimised costs by steadily increasing its offshore presence with over 78 per cent of its efforts being done largely from India.

A geographic-mix with North America (45.4 per cent of revenues), Europe (22.4 per cent) with the rest coming from high-growth regions such as India, MEA, and APAC including Japan too plays in its favour.

Polaris hedges only a small fraction of its inflows (less than a fourth) on a quarterly basis and could benefit from the rupee's depreciation to 51-plus levels against the dollar.

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