Polaris Software Labs Financial Analysis

POLARIS SOFTWARE Revenues Total revenue was Rs.1, 377.95 Cr in 08-09 against Rs.1, 099.30 Cr for 07-08, representing an increase of 25 %.The revenues of the company from its software services and product business constituted 96% of revenue and from business process outsourcing and professional services constituted 4% of revenue in the year 08-09. However, revenues in Rupee terms registered a growth of 25% primarily on account of rupee depreciation.

Operational income Income from software development services and products From 23% in 2007, the growth in income went down to 4% in 2008. In 2009 the Total revenue increased to Rs.1, 316.34 Crores registering a growth of 26%. The export revenue has also shown a upward trend over the three years. Income from Business Process Management The income from Business Process Management is from the wholly owned subsidiary namely, Optimus Global Services Limited. The growth in 2009 was 10.32% as against 77% in 2008 and 168% in 2007. Other income Other income increased to Rs.24.77 Cr. in the 2009 from Rs.3.65 Cr. in the previous year. This increase is primarily due to divestment of stake in AIG systems solutions Private ltd and dividend earned from mutual fund investments.

Accounts receivable Debtors are 14.74% of the revenues for the year 2009 and it is lesser than the previous years. The days of sales outstanding went down to 52 days as against 63 in 2008 and 60 in 2007.

Cost elements The primary cost drivers of the company are People related costs (Compensation & Benefits), Sales & Marketing Costs and Corporate Overheads. The automated systems and work flows support the cost review and approval process. As a % of total cost the staff related cost amounts to more than 75% over the last three years and it shows an increase from 2007-2009 Software development expenses Software development expenses primarily consist of compensation to software professionals; expenses on travel to execute work at client site, consultancy charges, software development charges, cost of software purchased for delivery to clients, bandwidth and communication expenses and proportionate infrastructure charges. Software development expenses as a % of revenue increased by 3.98 % compared to the previous year. The increase is primarily on account of Revenue in Rupee terms getting impacted by steep Rupee appreciation, increase in headcount on the BPO segment and salary revision granted during the year. In 2009, expenses decreased by 4 % compared to the previous year. The decrease is primarily on account of effective utilization of manpower. Selling, general and administrative expenses

Selling expense primarily consist of Salaries, Travel, Advertising, and Business promotion. General Administrative Expense primarily consists of Salaries and related costs for administrative, executive, finance and Human Resource function. Overall SGA expenses have been increasing over the past three years mainly due to headcount increase in geographies to cater to account management. The business promotion cost went up in 2008 mainly due to settlement made in Data Inc legal case.

Depreciation & Amortization Depreciation on fixed assets is provided using the straight-line method. There is no change in the depreciation method over the past three years. Individual assets costing less than Rs 5,000 are depreciated at the rate of 100 %. In case of the development of intellectual property, on the basis of an estimated useful life (calculated on the basis of Product Life Cycle, Technology obsolescence and competitor response) of the product, the capitalized expenses are amortized over 36-60 months period (3-5 years). In some subsidiaries and associates, depreciation is calculated on written down value basis. The depreciation charge in respect of these entities is not significant in the context of the consolidated financial statements.

Profitability From 101.06 crores in 2007, the Net PAT reduced by 26.2% to73.22 crores in 2008 mainly on account of unprecedented rupee appreciation. But in 2008 the Net PAT increased to 130.71 crores on account of effective utilization of manpower and better cost management.

Dividend From 45% on par value in 2007, the dividends came down to 30% in 2008 and went up to 55% in 2009

Investments No funds raised on short-term basis have been used for long-term investment. The investments in 2009 went up by 151.8% and 96% of the investments are in mutual funds.

Net worth The net worth of the company is as given below. The figures are in crores 2007 2008 Stated net worth 603.34 665.17 Tangible net worth 506.76 538.66

2009 779.67 499.50

In order to be conservative the tangible networth is calculated by knocking of the following Intangibles Investments Deferred tax asset Provisions Capital work in progress Though the stated net worth shows an upward trend the tangible net worth has reduced in 2009 by 7.2%. The stated net worth is high mainly because of the inclusion of investments

Assets: Tangible: buildings, leasehold improvements, plant and machinery, servers and computer accessories, furniture and fixtures, office equipment and electrical fittings and vehicles Intangible: indigenously developed software products and intellectual property which should not be taken into account.

Current assets: The debtors went up by 16.8% in 2008 and came down by 3.48% in 2007. The doubtful debts and hence the provision has been increasing since 2007. Loans The Company has not taken any loans, secured or unsecured from companies, firms or other parties covered in the register. The secured loans from the bank have been decreasing over the three years. From 1.29 crores in 2007 the loans came down to 0.36 crores in 2009. The Company has not defaulted in repayment of dues to a bank. The Company has no outstanding dues in respect of a financial institution or debenture holders from 2007 to 2009. The Company did not have any term loans outstanding during the 3 years. The Company has not given any guarantee for loans taken by others from banks or financial institutions.

Current liabilities In 2009 Total current liabilities have increased by Rs 66.15 Cr (36%), primarily on account of forward cover payable, salary payable, statutory liabilities, provision for expenses, billing in excess of revenue, gratuity and leave encashment.

Effective tax rates The effective tax rates went up in 2008 to 17.86% from 15.2% in 2007 and it came down to 11.9% in 2009. In 2008 the taxable income has shown a slump mainly due to the recession and it increased in 2009.