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Monday, July 19, 2010

Good fortune

MID-tier financial technology company, Polaris Software Lab, reported a decent performance during the June '10 quarter. Also, the company's elevated revenue and improved operating margin substantiate its annual net profit guidance of Rs 20.2-20.5 per share for FY11.
    During the period, the company's consolidated topline grew 18% to Rs 368 crore from a year-ago on account of better volume growth. Operating profit grew

at a faster pace of 33% to Rs 55.6 crore on account of lower increase in operating costs. Net profit shot up 46% to Rs 46 crore, boosted by higher other income.
    The US market contributed 46% of the company's total revenue. The rest came from the Asia-Pacific and EMEA (Europe, Middle East and Africa). BFSI is the single largest vertical for Polaris, with 94% share in revenue during the first quarter.
    Operating margin expanded 170 basis points (bps) to 15.1% year-on-year due to the higher scale of operations and better cost control. The company also fended off the impact of cross currency fluctuations due to the favourable forex hedging positions.
    However, the growing attrition from 18% in the March quarter to 20% is a cause for concern. To curtail the attrition, Polaris plans to raise salaries across the board in the current quarter. This is expected to pull its margins down. The company has added 23 clients during the quarter. It is also focusing on the cloud computing technologies to improve demand momentum. With the strong demand scenario and sturdy production volumes, the company is expected to fare
well in the following quarters.
    At Friday's close of Rs 190.4, the stock of Polaris traded at nine times its FY11 earnings per share guidance of Rs 20.5 on the higher side of estimates. The valuation sounds fair given the P/E range of 8-10 for mid-tier IT exporters.
Focus on gaming business

The financial performance of entertainment major UTV Software Communications for June '10 quarter saw an extraordinary jump of 132% in operating revenues mainly due to the low base of the June '09 quarter. The movies business, which had taken a backseat in the year-ago period due to the tussle between the producer-distributor lobby and exhibitors, made a turnaround to quadruple. The company's consolidated net profit stood at Rs 40.2 crore as against a net loss of Rs 31.8 crore.
    The company's film business still forms a substantial chunk of revenues contributing 56% to the topline of the company in the June quarter. The contribution of the company's broadcasting and television businesses was 24% and 12% respectively.
    The growth of the film business depends on several uncertain factors such as cast, content and promotion making the revenue flows highly volatile. Sensing this, UTV Software Communications is trying to reduce its dependency on this segment to generate its future revenues. With this in mind, the company has been consistently investing heavily in its gaming business, which still remains at a very nascent stage of revenue generation.
    For the June '10 quarter, the company's capital employed for this segment alone stood at around Rs 555 crore, which was more than Rs 545 crore of capital employed in its film business that generates its bread and butter. The company is targetting its gaming business for international markets-the US, Europe and the UK, which is generating around 6% of the company's revenues. Despite all the investment boosters, the revenues from this segment are unlikely to overtake the films business in next few years.
    Very high competition in the gaming market and long gestation period in building the customer base are the key reasons for the expected slow growth. It is claimed that globally the gaming market is three times bigger than the film business market and hence it remains to be seen how much share the company is able to get in this.

Winning investor's confidence
LIC Housing Finance ended the June '10 quarter with a high growth in its bottomline that grew 71% as against the year-ago period to Rs 212 crore. The net profit growth was driven by a high growth in its topline. The company's total income grew by about 30%, which was considerably higher than the average 17% growth in its total income over the previous three quarters.
    The June '10 quarter saw a growth of 51% and 40% in the company's loans approved and loans disbursed respectively. The company's conversion ratio - disbursements as a proportion of approvals - stood at 63%. This was considerably lower than the conversion ratio of housing finance major HDFC that hovers around 80% to 85%.
    Meanwhile, the company has ensured tight control over its asset quality. Net non-performing assets (NPAs) of the company stood at 0.35% of its total advances. This is outstanding considering that most non-banking financial companies (NBFCs) strive to achieve 1% benchmark.
    The company's net interest income (NII) grew 69% in the June '10 quarter compared to the same quarter of last year. NII is the difference between the interest earned and interest expended by the company. This boosted the company's net interest margin (NIM) by about 55 basis points. NIM stood at 3% at the end of the June '10 quarter.
    The company's stock rose to a 52-week high to Rs 1,085 on the day the results were announced. The surge in the stock price shows that the positive results in the quarter have increased investor's confidence in the company.
    (Contributed by Parul Bhatnagar, Rajesh Naidu
    and Jigar Desai)




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