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Friday, April 25, 2008

Polaris Software: A Time to Sell?

By Priya Nigam

A number of companies are opting for buybacks these days. We’ve heard more buyback announcements since the beginning of this year than during the whole of last year. Over the past four months, majors like Reliance Energy, Patni Computers, Madras Cements and Gujarat Flourochemicals have been in the news with buyback plans.

What happens in a buyback? A company repurchases its outstanding shares, which reduces the number of shares on the market. This reduction in supply boosts the value of shares. Moreover, it lifts the per share earnings. Buyback is one of the ways in which a company invests in itself. If a company has cash and does not have a better investment option, it may opt for a buyback. Buybacks are widely considered to be a sign that a company has faith in its future and that its share price is low.

A buyback often lends upside to a company’s share price. And, as we have just witnessed with Polaris Software Lab Ltd, disappointment on this front can take shares down dramatically. The Chennai-based company, which provides customized software solutions and products in the BFSI (banking, financial services and insurance) segment, saw its shares plummet close to 5% on news that it had deferred a proposed share buyback plan. Polaris would instead focus on its real estate investments and explore how leverage from this could maximize shareholder value. The company’s board has now appointed a committee to help make the decision in this regard. The decision could be announced at the next board meeting.

Investors were disappointed and could not be appeased by comment that the buyback had only been deferred and not cancelled. Investors have already been on tenterhooks, with the plummeting dollar having a huge impact on companies that outsource services to the US. In fact, Polaris Software’s consolidated after-tax profits plunged almost 28% to Rs73.215 crore in the year ended March 2008. The company’s performance was impacted by the appreciation in the rupee versus the dollar as well as the impact of the sub-prime crisis on the banking sector.

While Polaris has not escaped the impact of the US slowdown, it has been taking initiates to overcome weaknesses. It did report 14 new contract wins in the fourth quarter.

The company’s wholly-owned subsidiary Polaris Retail Infotech launched Smart Store last month. This is a retail software product for the small retail segment and a first of its kind for these businesses. With this, Polaris Software targets the SME retail market of the Asia-Pacific region, which is booming. The company also entered into a strategic partnership with City Networks in February. This alliance would provide product development and support services to City Networks. Moreover, Polaris Software is targeting 20% annual dollar revenue growth in the year ending March 2009 and about 30% net profit growth in dollar terms.

If you’ve held Polaris shares since early last year, you know what bungee jumping feels like! Having plummeted from Rs200 in April last year to Rs62 in January this year, shares are trading around Rs100. This is definitely not a time to dump Polaris shares. If you can be patient, it may be worthwhile to hold onto these shares for some time.

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