OVERVIEW
Polaris is a niche software Service Provider in FinTechspace, serving global customers
in BFS sector. Through a strong understanding of banking industry, the company employs
robust software engineering skills and has a sharp focus on customer delight. Currently,
Polaris serves customers in more than 30 countries, demonstrating execution excellence and
improving productivity for clients. In 2016, Virtusa Consulting Services Private Limited
acquired 52.94% of the Share capital of the company to enable the organization to increase
its footprint in BFS sector. Virtusa currently holds 74.50% stake in Polaris. Polaris
competence in corporate banking, payment systems and capital markets, combined with
Virtusas leadership position in retail banking and investment banking clients.
providessynergiestherebyenablingwiderangingsolutions Polariss business philosophy
involves adoptionof "ASSESS-ADOPT-GROW"strategy to transform experience,
operations and technology processes of customers, through a continuous culture of
innovation. Polaris is well equipped to execute this strategy, as it possesses various
Quality Accreditations including CMM L-5, ISO 9001, IS14001, OHSAS and ISO/IEC 27001,
showcasing a strong culture of process orientation and relevant competencies to build
Disruptive Business models. Polaris continues to focusondigitalbankingtransformation capabilitiesto
provide unmatched service to its clients leverageits and enable them to serve their
customers better. In line with the Chairmans statement in the last Annual General
Meeting, the company has consistently invested in Digital Enterprise 360 initiative to
deliver compelling customer experiences. Digital services was a focus area for revenue
generation during 2017 and positive feedback from clients has resulted in many new
initiatives being developed with top Banking clients. Additionally, several initiatives
across retail banking, Corporate Banking, Regulatory & Compliance and Capital Markets
are expected to solve critical Compliance, problemsinareasincludingpaymentstransformation,
fraud and AML Management. PSD2
TECHNOLOGY & IT INDUSTRY - GLOBAL OUTLOOK
Global technology industry is expected to grow at 4% led by artificial intelligence,
robotics and driverless cars. IT industry is expected to grow at the slowest pace in FY18
since FY10. Export market is expected to grow between 7% and 8% in constant currency as
against 8.6% growth during last year. IT-BPM market size is expected to be USD 1.2
trillion, with companies investing in business technologies to enhance stickiness with
customers and sustain competitiveness. In FY2017, IT-BPMs growth was around 4%, and less
than packaged software business. Global software sourcing markets in 2016 reached USD
173-178 billion and India continues to be the market leader with a market share of 55%.
At constant currency levels, USD 154 billion reserves are expected from IT-BPM segment
for Indian companies. This would amount to 49% of total service exports and contributes to
7.7% of countrys GDP. Of this total revenue, close to 76 % (USD 117 billion) is expected
from exports and balance from domestic business. DomesticIT-BPM business is expected to
grow at 10-11% during FY2018. Domestic business is expected to be driven by rapid
digitalization of payments, booming internet economy and GST implementation. IT spends by
banking and security firms in India are expected revenues of USD 7.8 billion.
Global Technology Trends
Gartners Strategic Review of Technology Trends, expected to dominate through 2017,
include Artificial Intelligence and Machine Learning; Digital Convergence related
technologies and Digital Eco system based technologies. 2017 would mark a year where
Artificial Intelligence and Machine Learning Research will continue as in advances in Deep
Learning, Neural Networks an Natural Language Processing enabling understanding, learning,
predicting Applications (Apps) and Intelligent Things (Internet of Things) would
adaptivesystemsforusers. progress to deliver advanced analytics, Automated / Self Learning
business processes and development of Computing Devices and IoT sensors that build on
Artificial Intelligence and Advanced Machine Learning. Secondly, Digital Convergence
related technologies would continue to develop. These include transformational
interactions between Software Systems and users through Virtual and Augmented Reality.
Digital Software models of physical things or systems are expected to combine data
provided by sensors and foster analysis through Software. A significant emerging trend in
BFS sector is the emergence of Block Chain Technology, a concept where distributed ledgers
are created in which value exchange transactionsare
sequentiallygroupedintoBlocks.Thisenablesprocessefficienciesand cost saving .
fororganizations and The company has significantly invested in developing & executing
several POCs for banking clients using Blockchain technology and are additionally
collaborating with leading clients to solve for regtech and compliance issues using data
sciences. The company has also developed the first Cloud Based Open Banking API Framework,
which has a strong traction in the market. The company continues to focus on BFSI, which
enables itself to be a differentiated player in the market.
Finally,digital ecosystem based technologies would show greater progress in 2017.
Conversational systems, digital technology platforms and Mesh App and Service
Architecture(MASA) is expected to improve customer experience,combine information
systems,enhance analytics and intelligence,integration with business ecosystems and IoT.
Geo Political Development & its impact on business
During 2017, two major geo-political events were expected to affect the IT-BPM
companies in India, viz., Brexit & Revised H1B Visa Regulations announced by the US
Government.
Brexit, exit of UK from the European Union, is expected to trigger uncertainty in terms
of citizenship, Visa Regulations and Border controls. However this event is complex and
significant changes are expected to unfold over many months or years. For the year 2018,
the company does not foresee any impact on its relationship with EU and UK clients. The
company will continue to work from its existing establishments
intheUKnadlookforopportunitiesto assist its clients to adapt to changes with new European
structures including legislation, regulations and compliance norms. The company is also
committed to taking care of employees while managing the change. The Executive Order on
H1B Visa Processing Regulations is not expected to change the current legal environment
significantly. The revised Regulations delve on compliance with specificfocus on Wage
equivalence and protection of employment rights of the skilled and highly
paiddomicileworkforce.Theregulations beneficiaries.
INDIAN TECHNOLOGY INDUSTRY - REVIEW AND OUTLOOK
Indian companies are well poised to maintain their leadership position in global
sourcing markets with a market share of 55%. Indian companies rank among top five
countries in terms of digitalization maturity (source: Accentures Platform Readiness
Index). Leading IT firms are diversifying offerings and showcasing leading ideas in block
chain and artificial intelligence themselves. FY2017 will see industry revenue touching
USD 154 billion, up from USD 143 billion in FY2016 and showing a growth of 8 per cent. In
addition, eCommerce will fetch USD 33 billion. In its contribution to the national
exchequer, IT- continues to fare favorably on several parameters - share in total service
exports is estimated at 49% and it contributes 7.7% to Indias GDP. Overall, the industry
is estimated to employ nearly 3.9 million people, an addition of 170,000 people
(approximately) In FY2017, IT-BPM exports from India is expected to
reachUSD117billion,a7.6%Y- continuesto be the fastest -Ygrowth.ER&D growing
segment at 10.5%, driven by global OEMs increasingly embedding software & services
into their products. IT services growing at 7% is driven by growth in software testing and
ISO. BPM exports, at 7.5% Y-o-Y growth is being driven by cloud (BPaaS), mobility and
advanced analytics. The trend and the factors contributing to growth are similar to global
markets, and encouragingly, at a faster rate. Domestic IT-BPM business is expected to grow
at 10-11% during FY2018. Domestic business is expected to be driven by rapid
digitalization of payments, booming internet economy and GST implementation. With more
than 375 million Internet subscribers, India has the 2nd largest user base after China. It
is most aggressive in global market shares across segments, be it the number of internet
users, smartphone users, app downloads, and online payments. There is significant push
from the government to go digital. Government in its union budget is expected to spend Rs.
10,000 crores for Bharat Net project to provide high speed broadband to more than 1,50,000
gram panchayats during 2017-18. It has also launched Bharat Interface for money (BHIM), an
Aadhar based mobile payment app to make digital payments to increase digitalization in
payments. Additionally, licenses were issued for pure-play payment banks (source:
Nasscoms Strategic review of IT-BPM sector, 2017) Despite the slower growth, IT industry
is expected to add 130-150K jobs in FY18 (170K jobs in FY17). On the whole, opportunities
exist in the market place for your company to achieve its objectives.
Internal Analysis
Strengths and Opportunities:
Polaris, being an established mid-sized player in the BFSI segment, has focused on
providing niche software services to banking and Polaris is expected to benefit from
Virtusa Indias strong consulting financial capabilities. Further, integrated marketing
efforts will result in synergies related to revenue generation and cost optimization.
Polaris delivers services across sub-segments in the BFSI segments including corporate
banking, retail banking, treasury and capital markets, and insurance to more than 100
clients across the world. It has established strong relationships with large international
banks providing critical IT services to their business centres worldwide, providing
opportunities for sustained revenue and increase share of wallet.
Polaris has a healthy financial risk profile driven by its healthy capital structure
with no debts and a net-worth of Rs.1091 crore as on March 31, 2017. Moreover, Polaris has
strong liquidity, marked by cash and cash equivalents of around Rs.537.04 crore as on
March 31, 2017.
Weakness and Threats:
Polaris has a high dependence on BFSI segment, whichissusceptibleto volatility and
business cyclicity in the global financial Besides, our top 10 clients account for more
than 75% of revenue, which increases client concentration risk.
In an Industry where scale gives competitive advantage, Polaris has chosen to be a
mid-size player with operating profitability at 10-12% over the last three years and was
11.6% during fiscal 2017.
Polaris operates in an industry which is highly competitive and changing technology
consumption patterns. Growing protectionist tendencies in key markets like US pose a
threat to mobility and availability of skilled resources and can lead to higher costs and
margin pressures.
Business Performance Review 2016-17 Revenue
Consolidated revenue grew by 1.38 % during the fiscal year 2016-17. The consolidated
revenue increased by 2.3% in constant currency compared to same period last year.
There was an overall growth of 3% in revenues of 2016-17 (USD 232.10 mn vs 224.10 in
the previous year), from top 10 clients. However a growth of 12% was achieved during
2016-17 from the top 5 clients (USD 208.10 mn vs 185.90 mn in the previous year)
indicating entrenched relationships leading to higher share of the wallet.
In terms of Geographical distribution of revenue, North America continued to be the
largest revenue contributor (50% of revenues) in 2017.
Business Operations
Manpower utilization was higher during 2016-17 by 3% although attrition rates were
higher and manpower count was lower than the previous year. DSO levels were marginally up
(81 days vs 78 days) due to migration to a new ERP system in the latter part of the year.
Company continued to maintain high liquidity levels with Cash, Cash Equivalents and
Investments at Rs. 537.04 Crores.
Internal Control System Review
The CEO and CFO certificationprovided in the Corporate Governance report of the Annual
Report certifiesthe adequacy of our internal control systems and procedures. The Internal
Auditors and SOX Auditors periodically review operating effectiveness of Internal
Financial Control and report the findings to the Audit Committee. As a measure of good
corporate governance all matters of significant importance or relevance have been reported
to the Audit Committee and the Companys auditors.
Risk Analysis & Mitigation Measures
Business is about managing risks even as business risk profile evolves in line with
altering dynamics. Business riskprofileis susceptibleto protectionist policies such as
those recently announced by the US, which accounts for more than half of total revenue.
The Companys risk are evaluated under the following major categories:
Market risk
Functional and Operational Risk
Exchange risk
Compliance risk
| Risks |
Impact |
Mitigation |
| Market risk |
Competition |
We focus on domain led solutions unaffected by competition and makes to win projects
despite competition from |
|
Rapidly Evolving Technologies |
We continueto make investments in Digital through training and reskilling, solutions
hiring and leverage of deep domain expertise We plan to reduce our dependency on work
permits through increased local hiring and training across major geographies we operate. |
|
Client policies such as consolidation |
|
|
Global Political and Economic environment development, external |
|
| Functional and Operational risk |
Arising out of various operational processes |
Risk Control Matrices (RCMs) are designed for all critical business processes which
aretested for design and operating effectiveness throughout the year under the SOX and IFC
programs |
|
|
We also have a robust internal audit program under the supervision of Audit committee
in place which also under takes audit of specificareas and theme based assessments. |
| Exchange risk |
tion fluctua Currency |
We have hedging policy in place which is aligned with best market practices to limit
impact to our earnings and cash flows from unfavorablecurrencyfluctuations |
| Compliance risk |
Government regulations Information/System/data security |
We have a dedicated information security team which monitors IT security requirements
of our customers |
|
|
We conduct awareness and training programs across the company on Information security
and compliance Internal and External audits |
|
|
We have a regular monitoring process of compliances across various locations of the
Company |
Financial Performance Analysis
The consolidated financials of your Company, its subsidiaries, Orbitech Employee
Welfare Trust and share of interest in the joint venture Intellect Polaris Design LLC
(Group) has been prepared in accordance with Ind AS, notified under the Companies (Indian
Accounting Standards), Rules, 2015. Upto the year ended March 31, 2016, the Group prepared
its financial statements in accordance with the requirements of previous GAAP, (Indian
GAAP) which includes Standards notified under the Companies (Accounting Standards) Rules,
2006. These are the Groups first Ind AS financial statements and the date of transition
to Ind AS is April 1, 2015. Accordingly all the comparative
andcorrespondingfigureshavebeenregrouped/reclassifiedin line with the requirement of all
applicable Ind AS.
Segment-wise Performance Analysis
Your Company has identified Segment Reporting in the Consolidated Financials based on
the "Management Approach" as defined in Ind AS Operating Segments. The Group
Operating Decision Maker evaluates the Group performance as a single business segment,
viz., Software and Consultancy Services.
Analysis on the Consolidated Financial Performance Revenue
Consolidated revenue grew by 1.38 % during the fiscal year 2016-17. The consolidated
revenue increased by 2.3% in constant currency compared to same period last year.
India operations fell by 4.15 % while overseas operations grew by 19.75%. The
significant increase in revenue from Overseas Operations was due to new contract wins from
few large overseas banking customers.
Employee Costs
Employee cost decreased reductionis primarily on account of reduction in
by3.47%duringthefinancialyear2016-17.This Employee cost out ofIndianOperations .
andincreasedonsitesubcontractingactivities
Other Expenses
Other expenses increased by 19.12% during the fiscal year 2016-17. This increase is
primarily on account of increase in onsite subcontracting expenses.
PBT
Growth in PBT before exceptional items is 4.22% in financial year 2016-17. The growth
was essentially on account of increase in revenue from Overseas Operations and reduction
in Employee Costs and subcontracting costs out of Indian Operations. The Company will
strive to improve capital efficiency and grow revenues in order to generate higher return
on capital employed.
Cash Flow Statement
Cash flows are reported by adjusting
netprofitbeforetaxforeffectofnon-cashtransactions,changes in working capital. Income taxes
paid,cash transactions of capital nature and cash
transactionsrelatingtoinvestingandfinancingactivities.Cash flows from operating,investing
reported separately. and financing activities were identified
Cash Flow Chart
Cash Flow from operating activities:
Net Cash generated from operating activities stood at Rs.99.96 Cr in FY 17 (Rs.296.46
Cr in FY16). Net cash provided by operating activities was following the utilization of
cash for tax and working capital requirements, driven by business needs in the current
year.
Cash flow from investing activities:
The net cash InFY17,the company used Rs.(25.88)Cr in investing activities. utilized in
current & non-current investments during fix assets Rs.19.65Cr.
theyearwasRs.6.23Crandforthepurchaseof
Cash Flow from financing activities:
Cash equivalents of Rs.321.24 Cr were InFY17,the company used Rs.7.67Cr in financing
activities. reported after considering the and investing activities and short term
investment balances at the end of cashflowfromoperatingactivities, the year.
Dividend
The Company has not declared dividend during the year 2016-17. The other details
pertaining to dividend policy are provided elsewhere in the Annual report.
Earnings per Share
Basic Earnings per share increased by 56.04 % from Rs. 10.19 per share to Rs. 15.90 per
share for the year ended March 31, 2017 as compared to the previous fiscal year.
Diluted Earnings per share increased by 56.80 % from Rs. 10.07 per share to Rs. 15.79
per share for the year ended March 31, 2017 as compared to the previous fiscal year.
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