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With
the Polaris and Orbitech boards approving a proposed merger
just a few days ago, the spotlight is on these companies,
and especially on Polaris, which aims to beat industry growth
rates by a huge margin, thanks to this deal and its inorganic
growth strategy. Srikanth R P analyses Polaris’s plans
and the deal
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| Govind
Singhal
and other Polaris head honchos are hoping the Orbitech-Polaris
merger and the organic growth strategy will form a powerful
combination to achieve massive growth |
In
the current Indian IT industry scenario where billing rates,
margins and bloated egos have all come crashing down, the
year ahead naturally seems to be one that bodes at best a
cautious outlook, hoping the worst has
been left behind. So when Chennai-based Polaris Software said
it was targeting a growth rate of 50 percent for fiscal year
2003 (and this with a fairly lacklustre performance in the
last quarter), analysts were surprised, to say the least.
Surprised, because in these times when most other Indian software
companies are cautiously expecting growth rates to be in the
range of 15-20 percent, Polaris aiming for 50 percent does
seem a tad over-ambitious.
The company expects 17-25 percent growth to come from the
organic route, and the rest from the inorganic route, i.e
through acquisitions. A look at the strategy that Polaris
is adopting throws up some interesting facts, which could
serve as pointers to other Indian IT companies.
Inorganic boost
The critical element in the 50 percent growth plan is the
inorganic growth strategy. Arun Jain, CEO of Polaris Software,
had indicated earlier that Polaris would be looking at companies
that have a good client base, cater to big projects but do
not have a significant offshore capabilities. Now, with the
Polaris board approving the proposal to merge with OrbiTech
Solutions, the proposed merger would make the combined entity
the fourth largest player in the banking and financial services
and insurance (BFSI) segment, just behind leaders like TCS,
Infosys and Satyam. Under the terms of the agreement, which
has been approved by the boards of both companies, shareholders
of OrbiTech will receive approximately 14 newly issued Polaris
shares for every 25 shares held in OrbiTech. Polaris shareholders
will own approximately 46 percent and OrbiTech shareholders
will own 54 percent of the merged company. Analysts believe
the acquisition of OrbiTech was a logical choice for Polaris
since the company had around Rs 220 crore in revenues and
the acquisition gives it the power to propel itself into the
Big League.
Merger dynamics
OrbiTech is fully owned by Citibank Private Equity and derives
most of its revenues from providing solutions to Citigroup.
Citigroup owns close to 6.25 percent of Polaris and contributes
around 35 percent of business to Polaris. While Polaris closed
fiscal 2002 with a turnover of Rs
283 crore, Orbitech closed 2002 with a turnover of Rs 333
crore.
What does the merger hold for both companies? Explains Girish
Pai, IT analyst, SSKI Securities, “We believe the merger
would bring together organisations with domain skills (Orbitech)
and offshore execution skills (Polaris). The increased credibility
and deeper domain execution skills will help in winning new
clients and drive revenues. Also, current market trends indicate
that the business environment is improving through the BFSI
space. The merged entity will be a beneficiary of this trend.
We expect the merged entity to be a strong contender for the
bigger RFPs (requests for proposals) being floated around.”
The merged entity would have a mammoth 85 percent exposure
to the BFSI segment said to be the most stable, and of course,
the biggest revenue segment for the Indian software industry.
For instance, Infosys derives around 37 percent of revenues
from this segment while Satyam derives 39 percent.
As OrbiTech has currently lesser exposure to external clients,
the merger will help OrbiTech in applying its domain skills
to a larger number of clients that Polaris has
been successful in bagging. Also, analysts believe that the
merged entity complement’s OrbiTech’s strengths
in products and Polaris’s strengths in services. As the
merged entity would have around 70 percent of revenues from
the Citi group and around 5-10 percent of revenues from products,
market sources believe the company has good growth prospects
as it has the backing of a strong parent, similar to what
is being enjoyed by Digital Globalsoft.
The other important aspect is the cultural synergy between
the two companies. OrbiTech and Polaris have a long history
of having worked together in their engagements with Citibank.
Of the current 700 employees subcontracted by OrbiTech, around
400-500 are from Polaris. Adds C Govindarajan of Motilal Oswal
Securities, “Polaris is believed to have co-developed
a large number of OrbiTech’ s products, though the IPRs
rest entirely with OrbiTech. IPR protection could be another
indirect benefit of the merger.”
Another strong reason is the fact that Citigroup is said to
be outsourcing services worth close to $250 million from India.
It outsources its requirements to companies like TCS, i-flex,
Orbitech, Polaris, Infosys, Silverline and Wipro. In addition,
OrbiTech sub-contracts part of its work to Polaris. Polaris
currently derives about 13 percent of its revenues from OrbiTech.
A merged entity will simply mean that most of the orders will
stay within the company instead of being sub-contracted to
other entities as is being currently done.
For Polaris, in spite of the huge dependence on a single client,
the risks are considerably lesser as Citigroup will be not
only a client but also a strategic shareholder. The fly in
the soup could be billing rates though. One of the biggest
benefits to Citi from this deal could be the lower billing
rates the global financial services will get thanks to the
huge volume of business involved. The merged entity might
face an uphill climb on this front. Yet, on the bright side,
the large volumes do assure the merged entity a steady flow
of revenues.
Organic route
Polaris has also made a tangible shift towards the offshore
business model and this is witnessed by the fact that Polaris’s
offshore centric revenues have grown by 45 percent to Rs 177
crore for the fiscal ended March 2002. Analysts believe this
is a positive move from the company and a shift from the comparatively
low value onsite business that the company was pursuing last
year.
Says Govind Singhal, executive director, Polaris, “Polaris
recognised the need to adapt to changing market requirements
and has displayed greater clarity to shift some of its services
to major clients, moving from the onsite model to the offshore
outsourcing model. This shifting pattern is also an appreciation
of the value proposition that outsourcing offers. Going forward,
we remain confident that offshore-centric relationships are
stocked with tremendous business potential, providing enough
scope in the long run, both in terms of volume and returns.”
This move has also given the company an improvement in its
operating margins.
While the company expects services to contribute in a major
way to revenues, it is also extremely bullish on its product
called BankWare. The company anticipates product revenues
through BankWare to be close to Rs 20 crore in the coming
fiscal year, up from Rs 5 crore. As the current base is small,
analysts believe that the growth targeted is eminently achievable.
But concerns still persist on the long term growth of the
product, as the banking products space is dominated by biggies
like Infosys, i-flex and TCS.
But analysts believe one main reason for the optimistic growth
projections is the impressive addition of clients. Says Shekhar
Singh, IT analyst, Prabhudas Lilladher Securities, “The
fact that the company has been able to add reputed clients
like UBS, AIG, CommerzBank, Snecma Motors, Keycorp and Honeywell
in the past few months in tough times speaks a lot of the
management of the company.” Analysts believe that the
Snecma Motors order and the contract for implementing a BAAN
solution for Honeywell is a recognition of Polaris’s
ability in becoming one of the preferred global outsourcing
partners from the Indian region.
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