Intellect Design Arena Polaris Product Businessmailers.sparkcapital.in/uploads/Tech/Polaris...

Intellect Design Arena – Polaris Product Business Target

Rs. 100

Stock Performance (%)

1m 3m 12m

N/A

Sensex -1 2 32

CNXIT -4 0 23

Financial Summary

Year Revenues (Rs. mn) Gross profit (Rs. mn) EBITDA (Rs. mn) EPS (Rs.) EV/Sales(x)* EV/EBITDA(x)*

FY15E 5,825 3,040 -405 -4.3 0.8 NM

FY16E 6,446 3,478 -57 -0.6 0.7 NM

FY17E 7,343 4,185 306 2.1 0.6 14.6

Initiate with a fair value of Rs. 100

Initiating Coverage

Date Nov. 20th, 2014

Market Data

SENSEX 28033

Nifty 8382

Bloomberg

Shares o/s 100mn

Market Cap

52-wk High-Low

3m Avg. Daily Vol

Index member

Promoters 29.1

Institutions 27.1

Public 43.9

SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039

AISHWARIYA KPL [email protected] +91 44 4344 0040 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Intellect Design Arena (INDES) is a BFSI focused product company created by vertical demerger of Polaris in Mar-

14 and would be listed on in the bourses on 18th December. POL’s shareholders not keen on holding shares of

INDES have the option of exchanging the same for an NCD (redeemable in 3 months annual coupon of 7.75%) of

Rs. 42 in the ratio of 1:1. INDES has five major products in the BFSI space – iGTB, iGUB, iRTM, Intellect SEC and

Intellect Quantum – which has been highly rated by various analysts. Increasing shift towards smart legacy

mordernisation, SMAC and regulatory compliance across Banking and Financial markets is forcing banks to

overhaul their legacy systems. This is expected to be > US$ 32 bn opportunity for banking software companies.

Additionally, INDES has undertaken significant steps since realignment of business in FY13, to improve the

marketability of its products. We expect the fruits of these efforts to be seen in FY16E with INDES reporting

double digit US$ revenue growth. Globally, Product companies of revenues > than US$ 100 mn trade at an

EV/Sales of 2-3(x). Given the tepid growth and negative margins, we would like to value INDES at 1x Dec-16 Sales

which gives a fair value of Rs. 100.

Banking products – A large untapped market: IT spends in banking sector is higher than other sectors (>7% vs. 4% of

total revenues) as IT Technology in banking sector (especially in western markets) are still inclined towards legacy

systems. Changes in technology and reduce time to market are forcing banks to use packaged software to modernise their

IT landscape. With most of the banks modernising their legacy systems, the market opportunity for Application software is

expected to be > US$20 bn.

Restructuring efforts underway would aid revenue growth from FY16E: INDES has undergone a gamut of changes

since realignment of POL business in FY13. Notable among them include – Establishing separate leadership and sales

team for each sub product; Hiring ex-CIOs of global banks to increase farming in these accounts, Scouting for SI

partnership with IT service vendors, increasing geographical footprint etc. We believe these efforts would led to a double

digit US$ revenue growth from FY16E onwards.

Deep discount to international peers would continue till return of growth: Globally, product companies of revenues >

than US$ 100 mn trade at an EV/Sales of 2-3(x). Given the tepid growth and negative margins, we believe INDES would

continue to trade at a deep discount to its international peers till improvement in revenue growth. With S&M investments to

continue in the near term, operating margins would breakeven by end of FY17E.

* Calculated by taking price of Rs.70


Rs. 100

Timeline – Key events

Source: Polaris – IM, Spark Capital Research

Description:

In Mar-14, POL decided to vertically demerge the products business

into Intellect Design Arena. POL’s shareholders not keen on holding

shares of INDES have the option of exchanging the same for an NCD

(redeemable in 3 months annual coupon of 7.75%) of Rs. 42 in the ratio

of 1:1.

Intellect Design (INDES) would get listed in the bourses on 18th

December.

INDES business consists of five main product categories – iGUB

(Global Universal banking platform), iGTB (Global Treasury Banking

platform), iRTM (Risk & Treasury banking management), Intellect

Quantum (Central banking platform) and Intellect SEEC – Enterprise

insurance platform. Integrated across various OS and devices, INDES

products have been highly rated by industry analysts.

US$ revenues has been tepid for the last two years led by low deal

wins and sale of Identrust

Source: Company, Spark Capital Research

2009

Acquisition of LaserSoft

Intellect Payments launched

1999

Product

Development

for NCR

2003

Acquisition of OrbiTech Solutions from

CitiGroup and its subsequent merger

with Polaris

The acquisition led to 57 product IPR

being transferred to Polaris

2004

“Intellect Suite” of

products for

boundary‐less banking

was launched – CBS,

Custody, Platforms

2005

Launch of Next generation

Intellect “Banking Platform” –

Trade Finance, Portal,

Treasury

2006

Intellect Wealth & Risk (ALM),

Liquidity Platform launched

Product portfolio expanded with

Acquisition of SEEC and increased

Footprint in Insurance space

2010

200th Intellect

implementation goes live

Acquired Indigo Tx

GUB M180 & Brokerage

platform launched

2011

BASEL III ready

solutions and

Intellect LRM

launched

2012 2013

Intellect FABX

for Financial

Advisors

launched

FT8012 – the

largest

dedicated

Design Center

launched

Business Overview

-20%

-10%

0%

10%

20%

30%

40%

50%

0

20

40

60

80

100

120

FY08 FY09 FY10 FY11 FY12 FY13 FY14

(%)

US

D m

n

US$ Revenues YoY growth


Rs. 100

License revenues is 10% of sales compared to >25% for most

international peers led by low deal wins


RoW and India contributes ~55% of Polaris revenues


Americas 18%

Europe 29%

India 12%

RoW 40%

Intellect Recent deal wins

Swedish central bank chose Intellect® Quantum Collateral Management System

to provide liquidity against a wide range of cross currency collaterals spread

Trade division of a UK-based global financial services provider chose Payment

product from the iGTB suite

Vietnam Bank for Social Policies chose Intellect Core banking for its 692

branches

A old-gen private sector bank in India chose Intellect Cash management

A leading Canada-based financial institution revamped its central research portal

using CANVAS Technology framework

US based payment provider chose intellect to modernise merchant related

services

Notable client wins under each product

iGTB iGUB iRTM Intellect SEEC

HSBC Deutsche Leasing,

Germany

Citibank ICICI Prudential

Barclays Shinsei Bank, Japan RBI Allianz

ANZ RBI, India Credit Suisse Federal Life

JPMC ICICI bank, India Bank of Jordan Nation Wide, US

SEB,

Sweden

Riksbank, Sweden Deutsche Bank Royal Bank of

Canada

Bank of

Montreal

National Bank of Abu

Dhabi

HDFC, India St.James Place,

London

Source: Company,Spark Capital Research

Business Overview

License 10%

Professional services

45%

Support 43%

SI 2%



Rs. 100

With the advent of SMAC, package software contribution is

expected to increase more than threefold

Source: Temenos,Spark Capital Research

$-

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

Third parties today Banking software

US

$ b

n

Core banking Wealth BI Channels Payments

..but penetration of package software is the lowest in banking sector


Banking sector has the highest cost owing to legacy systems..


0%

20%

40%

60%

80%

100%

Industr

ials

Energ

y

Consum

er

Healthcare

Public

secto

r

Insura

nce

Te

lecom

Bankin

g

Banking products offer a large and untapped market

IT spends in banking is higher than other sectors (>7% vs. 4% of total

revenues) as Technology in banking sector (especially in western

markets) are still inclined towards legacy systems. Further, most large

banks and financial institutions have used home grown applications

than to buy ready made packaged software. Penetration of packaged

software is low owing to large companies unwillingness to undergo a

rip-replace procedure that would impact their ser vice delivery ability

Changes in technology and reduce time to market are forcing banks to

use packaged software to modernise their IT landscape. Concepts like

Smart Legacy modernisation are helping banks to modernise their core

systems in parts.

The combined market for various banking products are over US$ 20bn

and would entail substantial professional services too.

0% 2% 4% 6% 8% 10% 12% 14% 16%

Banking

Insurance

Telecom

Public Sector

Healthcare

Consumer

Industrial Goods

Energy

US$ 7 bn

US$ 32 bn

Packaged Banking Software – Market Opportunity is Huge


Rs. 100

Global transaction banking (iGTB):

iGTB, the largest revenue driver for INDES, is a complete global

transaction banking platform which covers Wholesale banking, Trade

finance and Payment hubs for both banks (corporate banking) and

corporate houses.

Fundtech, ACI and Bottomline are key competitors in this space.

Transaction banking has the highest IT spend and accounts for 31% of

the bank’s operating expenses. With most of the legacy systems build

in this space and forced to change led by compliance and Digitalisation,

Transaction banking offers a huge opportunity to packaged software

players.

With most of the corporate houses spreading their finance

functionalities, payments and treasury management are attractive sub

verticals to operate

Wholesale payment flows are four times global GDP and is growing

around 7% p.a. With incremental spending in mobile banking, increase

in payment gateways, foray of Global Telecom into service linked

payments (Eg. Airtel money), Payment management sub vertical alone

provides ~US$ 5 bn market opportunity. INDES’ Payment services hub

is a preferred product in this segment.

Post realignment of business in FY13, INDES has made a gamut of

changes to improve marketability of its flagship product – iGTB. Notable

among them include strengthening top management for the product to

increase autonomy, establishing separate global sales team and

increasing presence in emerging markets. iGTB has been historically

strong in developed markets.

INDES’ Customer Business eXchange product vs, peers

Source: Company, Spark Capital

Commercial Online

Banking

Core

Functionality

User

Experience

Design &

Security

Enterprise

Support

Intellect TM Customer

Business eXchange 4.5 4.4 4.7 4.2

Product A 3.9 4.3 4.8 4.3

Product B 5.0 4.5 4.4 4.0

Product C 4.7 4.2 4.8 4.2

Product D 4.6 4.1 4.4 4.0

INDES’ Payment services hub vs. peers

Source: Company, Spark Capital

Payment Services Hub Payment

Capability

Payment

Operations

Product

Support

Enterprise

Support

Intellect Payment

Services Hub 4.71 4.80 3.68 4.11

Vendor A 4.79 5.00 5.00 4.56

Vendor B 5.00 4.60 5.00 4.50

Vendor C 5.00 4.50 3.73 4.00

Vendor D 4.18 4.20 4.14 4.22

Vendor E 4.57 4.71 4.82 4.33

Vendor F 4.93 4.20 4.27 3.89

iGTB Positioning & Opportunity


Rs. 100

Polaris positioning in iGCB business


Top

Players

Major

Players

Other Global

Players

Temenos

Infosys, SAP, SunGard*

FIS, Misys, Polaris Financial Technology, TCS

ICS Financial Systems, ITS, Sopra Banking Software

Avalog, BML Istisharat, Capital Banking Solutions, Cobracorp, CSC, Diasoft, De Larrobla and Associados,

ERI Bancaire, Nucleus Software Exports, Path Solutions, Profile, SAB, Top Systems

75 counted

deals; more than 5

regions*

50 counted

deals; more than 3

regions*

20 counted deals;

more than 3

regions*

20 counted deals;

2 or 3 regions*

< 20 Newly

counted

deals or

2

regions

Strong

Players

Global Universal banking (iGUB):

iGCB, second largest revenue driver for INDES, is a global customer

banking platform which covers the entire range of business

processes across retail banking, private banking, capital markets and

Asset management. It is an unique banking platform that can co-exist

with legacy systems and support future modernization.

Globally, banks spend around ~17% of their operating expenses on

retail banking and ~ 16% of their operating expenses in private

banking (IT spends). Consultants estimates suggest that the software

market opportunity in these segments would be around US$ 5- US$

10 bn.

Temenos (T24), Infosys (Finacle) and Oracle financial services

(Flexcube) are key competitors in this space.

iGCB product – Way ahead:

INDES has been strengthening the top management under each

product and building in a separate hunting team for each to increase

autonomy and capabilities under each product. Mr. Jaideep Billa and

Mr.R.Shivashankar is the CEO & CMO of iGUB product segment

respectively.

Traditionally developed markets like US has been the focus area for

iGCB business. INDES has been made huge S&M investments to

increase focus in emerging markets.

INDES has also been hiring ex- CIOs of major banks to increase the

farming activities across these exisitng clients.

iGUB Positioning & Opportunity


Rs. 100

Risk and Treasury management (iRTM):

iRTM suite is a complete front to back, cross- asset solution with

embedded Straight Through Processing which is mainly used by

participants in the Capital markets.

Globally, around ~20% of banks operating expenses is spend in Risk

and Treasury management. The market is expected to grow with

improvement in the trading ecosystem of global treasuries and

increasing regulatory compliance

Intellect treasury, Intellect Custody, Intellect Brokerage, Intellect MFX

and BASEL III are key INDES’ iRTM sub products

Misys, SunGard and Murex are key competitors in this space.

Insurance (Intellect SEEC):

INDES has small presence in the U.S and Asian insurance markets.

Intellect SEEC provides differentiated products in Claims (Both Life and

non Life), Distributed Solutions, Underwriting stations , Business Apps

segments

Being a regional player, INDES competes with small companies like

Guidewire, Fineos in this space.

Intellect SEEC could reduce the time to market for both Life and Non

Life Insurers than other Tier 3 service providers by 60%. INDES has

been taking steps to improve the insurance products’ market share by

participating in exhibitions and conferences, improve their ranking given

by private consultants like Celent and hiring senior level sales

personnel.

iRTM Revenue growth potential(x) vs. peers


Intellect SEEC vs. peers


Vendor

(Solution)

Enterprise

Data

Mastery

Roadmap

BI

Presenta

tion Analytics DW/DM ETL

BI

Content/

Data Set Big Data

Accenture

CSC

IBM

Polaris

Software

Oracle

TiM

S R

ead

ine

ss I

nd

ex

Belin 0.50

Kyriba 0.86

Misys 0.42

OpenLink 0.50

Polaris 0.59

Reval 0.82

SunGard 0.67

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

iRTM and Intellect SEEC’ Positioning & Opportunity


Rs. 100

Temenos: Segmental revenue contribution and Gross Margin over time

Source: Comapany,Spark Capital Research

60%

65%

70%

75%

20

30

40

50

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

(%)

License Maintenance Professional services Gross margins

SI partnerships with IT service vendors would bring huge revenue

opportunities:

Agreement with strong Global IT service players like Wipro, Cognizant

etc. to become INDES’ SI partners would improve the revenue

trajectory profoundly as these companies influence client behaviour in

procuring application software. Additionally, with Professional services

having the lowest margins, outsourcing of this service to SI partners

would led to gross margins improvement.

Temenos case study: In FY08, Temenos earned around 38% of its

revenues from Professional services. Outsourcing professional services

to Global IT vendors like Cognizant aided in reduction of these services

to 25% in FY13. This has led to Gross margins improvement of 700 bps

during the same period.

Concluding, SI partnerships not only provide a huge revenue

opportunity but also help in gross margin improvement.

Few SI partners for major Banking products years


Temenos Cap Gemini, Cognizant, Tech Mahindra

Infosys HP,IBM

SAP TCS, CTS, Accenture, Wipro, Infosys

OFSS Wipro, Accenture, Tech Mahindra

TCS Wipro

Strong SI Partnerships are Huge Levers of Revenue Growth

Decline in Professional services


Rs. 100

Improving license sales would be a strong lever for growth in FY16E

Typically, INDES’ makes 25-30% of the customer life cycle revenues

during the build and implement phase, while the remaining 70% of

revenues from maintenance and support over the next 10 years.

For the last two years, INDES revenue growth has been tepid led by

low deal wins. License sales of INDES is 10% of total revenues vs.

>25% for international peers. Additionally, License revenues has the

highest gross margins and Professional services has the lowest gross

margins. INDES has gross margins of 50% vs. international peers of

70%-80%.

With most of the restructuring efforts bearing fruits, we expect INDES to

win more deals in the coming quarters. 2-3 new deal wins (> US$ 5 mn)

could increase license revenues from current 9% to > 30%, which

would be the sole driver for double digit growth in FY16E and FY17E.

INDES has made 221 product implementations across the globe


ASIA IMEA EUROPE AMERICA TOTAL

iGUB 16 90 4 3 113

iGTB 15 26 12 8 61

iRTM 3 41 1 2 47

Total 34 157 17 13 221

INDES lower license revenues has led to lower gross margins


Though gross margins would improve in the coming years, EBITDA

margins would continue to be negative with increased investments:

With improving license sales, we expect gross margins to improve by

200 bps and 300 bps in FY16E & FY17E respectively. However, these

gains would be offset by increased S&M investments. INDES has been

adding 25+ people in sales in the last 4 quarters, most of them being

senior sales guys or Ex-CIOs. The company plans to add around 100

more people in the coming years.

R&D costs would continue to be at similar ranges with increased

investments going into sustaining and launching newer offerings

As of Q1FY15, INDES had hedges worth US$15 mn (booked @

Rs.63.6) and US$ 20 mn (booked @ Rs.67.6) for FY15E and FY16E

respectively. In FY16E, INDES would have post tax hedge gains of

Rs.128.5 mn or Rs.1.3/ share (assuming Rs./US$ rate at Rs.58) which

could provide tailwinds to PAT margins.

License Sales – Sole Driver of Revenue Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

INDES Temenos ACI Worldwide Bottomline

License revenues Gross margins


Rs. 100 Scenario Analysis and Valuation

Scenario analysis

Current estimates Bull case Bear case

Particulars FY16E FY17E FY16E FY17E FY16E FY17E

US$ revenues 111.1 126.6 119 145 106.1 114.0

Growth (%) 14.6% 13.9% 22.5% 22.5% 9.4% 7.5%

INR revenues 6,446 7,343 6,893 8,437 6,152 6,615

Growth (%) 10.7% 13.9% 18.3% 22.4% 5.6% 7.5%

Gross margins 54.0% 57.0% 54.9% 57.5% 52.7% 53.1%

EBITDA margins -0.9% 4.2% 1.2% 6.9% -3.0% -1.7%

Diluted EPS -0.6 2.1 0.5 4.2 -1.5 -1.0

EV/sales 1x 1.5x 0.8x

TP 100 145 80

Our current TP is based on 1x

Dec-16 EV/Sales although

International peers (US$ > 100

mn) trade at 2-3 (x) EV/Sales.

Our current US$ revenue

growth estimates assumes

more than >20% yoy growth in

License revenues while our

bull and bear case estimates

assumes license growth of

30% and 7% respectively.

Valuation of Banking product companies (GLOBAL)

Year end M.cap

(USD) EV (USD)

Gross margins

(3 yr)

EBITDA

margins (3 yr)

EV/sales EV/EBITDA

CY Y+1 Y+2 CY Y+1 Y+2

Temenos 12/14 Y 2,573 2,735 69.6 27.0 5.8 5.5 5.0 17.2 16.2 14.3

ACI Worldwide 12/14 Y 2,167 3,053 65.8 20.5 3.5 2.9 2.7 15.8 11.3 9.9

Bottomline 06/15 Y 929 884 54.8 10.4 2.9 2.7 2.5 27.3 12.8 11.7

Ifs Ab-B 12/14 Y 783 748 49.5 13.9 2.1 1.9 1.8 13.6 10.6 9.3

Nucleus Software 03/15 Y 103 65 NM 16.0 1.2 1.1 1.0 6.1 4.9 4.2

OFSS 03/15 Y 4,470 4,011 NM 35.9 6.7 6.1 5.3 17.9 15.4 13.3

Source: Spark Capital Research, Our assumptions does not consider investors selling INDES shares for NCD

Source: Bloomberg,Spark Capital Research


Rs. 100 Financial Summary

* Calculated by taking price of Rs.70.

Rs.mn. FY15E FY16E FY17E FY15E FY16E FY17E

Profit & Loss Cash flows

Revenues 5,825 6,446 7,343 Cash from operating -209 -123 95

Softw are dev. Costs 2,785 2,968 3,158 Cash from investing -39 0 -3

Gross profit 3,040 3,478 4,185 Cash from financing 10 10 10

S,G&A costs 2,401 2,387 2,616 Free cash flow -329 -283 -65

R&D costs 1,044 1,149 1,264 Key ratios (%)

EBITDA -405 -57 306 Revenue grow th NM 10.7% 13.9%

Dep. & Amortisation 191 179 177 EBITDA grow th NM NM NM

EBIT -596 -237 129 PAT Grow th NM NM NM

Other income 150 160 157 EBITDA margin -7.0% -0.9% 4.2%

PBT -446 -76 285 EBIT margin -10.2% -3.7% 1.8%

Tax -16 -19 71 PAT margins -7.4% -0.9% 2.9%

PAT -430 -57 214 ROE NM NM NM

EPS - Diluted -4.3 -0.6 2.1 ROCE NM NM 3.4%

Balance Sheet Valuation metrics

Share capital 498 498 498 Shares o/s (mn) 99.7 99.7 99.7

Reserves & surplus 6,225 6,168 6,382 Fully diluted shares (mn) 100.7 100.7 100.7

Total shareholder's equity 6,724 6,667 6,881 Market cap (Rs. mn)* 6,979 6,979 6,979

Other long term liabilties 158 158 158 EV (Rs.mn)* 4,459 4,572 4,470

Total liabilities 6,882 6,825 7,039 EV/Sales (x)* 0.8 0.7 0.6

Net Fixed Assets 1,836 1,817 1,800 EV/EBITDA (x)* NM NM 14.6

Goodw ill 754 754 754 P/E (x)* NM NM 32.9

Other long term assets 881 881 881 Other ratios (%)

Cash and investments 2,587 2,475 2,576 DSO days 87 86 86

Debtors 1,389 1,520 1,737 NWC days 52 51 51

Total current assets 5,570 5,738 6,305 Book value per share 66.8 66.2 68.4

Current liabilities & provisions 2,159 2,365 2,701 Cash per share -2.1 -1.2 0.9

Total Assets 6,882 6,825 7,039 FCF per share -3.3 -2.8 -0.6

Financial summary


Rs. 100

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Disclaimer


Rs. 100

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement Yes/No

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

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products or services other than those above

in connection with research report

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