Shares of mid-sized IT company, Polaris surged by 6% in Monday's trade but ended the day with 4.13% gains at Rs 116 a piece, on buzz surrounding hiving off of its IT services business - FT Sourcing. As per media reports, the company has approached Wipro and Larsen and Toubro to acquire its services business. However, experts believe, larger IT players may not be keen to buy this business given the relatively smaller size (revenues of $80.9 million for the December 2012 quarter) and the fact that FT Sourcing caters to large clients in the financial services space - a domain where all the large Indian IT players have a strong foothold. Thus, the larger players do not stand to gain much from this buyout. However, mid-sized overseas based companies may show interest in buying out this business as Polaris has strong relationship with its marquee clients in the Banking and financial services space.
Further, Polaris' highly skilled and experienced employee base (average experience of 6.5 years versus 3-3.5 years for peers) is also a significant asset.
In sync with the weak demand environment, Polaris has been struggling to grow its services business (76.5% of total revenues) and has been losing out to tough competition from its peers as well as rising pricing pressures. Its services business has de-grown by about 2% since the June 2012 quarter, while products business growth has remained volatile. Given that the company offers IT products as well as services, there is a conflict of interest amongst the clients. Also, the company is valued on a combined basis. While current valuations of 5 times FY14 estimated earnings appear inexpensive, analysts remain concerned about the volatile nature of its products business (restricting revenue and earnings visibility) and slowing services business.
"We expect 1% EPS CAGR over FY12-15, owing to lack of traction in the services business, unpredictability of the products business, and possible margin headwinds as prices remain under pressure in the service business and the currency benefit comes off", believes Ankur Rudra, IT analyst at Ambit Capital. He has a Sell recommendation on the stock and a target price of Rs 118. However, the hiving off of services business may improve sentiments around the stock, providing a good exit opportunity, believe analysts.
Further, Polaris' highly skilled and experienced employee base (average experience of 6.5 years versus 3-3.5 years for peers) is also a significant asset.
In sync with the weak demand environment, Polaris has been struggling to grow its services business (76.5% of total revenues) and has been losing out to tough competition from its peers as well as rising pricing pressures. Its services business has de-grown by about 2% since the June 2012 quarter, while products business growth has remained volatile. Given that the company offers IT products as well as services, there is a conflict of interest amongst the clients. Also, the company is valued on a combined basis. While current valuations of 5 times FY14 estimated earnings appear inexpensive, analysts remain concerned about the volatile nature of its products business (restricting revenue and earnings visibility) and slowing services business.
"We expect 1% EPS CAGR over FY12-15, owing to lack of traction in the services business, unpredictability of the products business, and possible margin headwinds as prices remain under pressure in the service business and the currency benefit comes off", believes Ankur Rudra, IT analyst at Ambit Capital. He has a Sell recommendation on the stock and a target price of Rs 118. However, the hiving off of services business may improve sentiments around the stock, providing a good exit opportunity, believe analysts.