Chennai: Challenges are not new to the 45-year old Arun Jain, CMD and CEO, Polaris Software Lab Limited. He has built Polaris from the scratch, and now he plans to transform the business - essentially a software services company - into a product / services / solutions marketing company.

Towards this end, Polaris recently launched a banking software product Intellect globally, a product on which the company is betting its hopes and has spent around Rs48.5 crore in development, branding and marketing.

In the short term Jain has to convince his investors to continue to back Polaris and wait for the business to show results, which according to him, is twelve quarters away.

At a time when companies are being forced to show results every quarter, this is a major challenge. Moreover, the year-end financial results for 2004, too, were insipid. While the turnover increased by Rs218.14 crore to Rs646.42 crore, net profit went up by a meagre Rs3.43 crore to Rs72.20 crore. More important, despite an increase in the total income, Polaris' fourth quarter profit dropped by nearly half to Rs10.52 crore compared to the last quarter of 2003.

Moreover, the company's expenses increased dramatically, though some like the software development expenditure of Rs.408 crore (up by Rs148 crore) could be termed normal. Others like bad debts at Rs2.84 crore (an increase of Rs1.36 crore) and the spurt in the debtor position from Rs148 crore at the end of 2003 to Rs. 171 crore at the end of last fiscal.

The company also incurred a huge foreign exchange loss of Rs.9.35 crore, (up by Rs.5.47 crore). Similarly, other expenditure heads like salaries, insurance, legal expenses, professional charges, finance charges too grew while the margins came under pressure.

The attrition rate for the company hovers around 14 per cent, and Polaris expects a further increase in the staff compensation by 200 to 250 basis points. Given the tough market situation, passing these hikes to customers is going to be nearly impossible.

Similarly, the performance of Polaris' subsidiaries, Polaris Retail Infotech (the retail industry software company) and Optimus Outsourcing Company Limited (the BPO arm) as well as its associate companies are not significant.

And, finally, the big question that probably haunts Jain is, whether the high profile takeover of Orbitech Solutions two years ago helped in topline and bottomline growth. Certainly the merger hasn't resulted in better earnings per share (EPS).

At the bourses, Polaris' share (face value Rs5) trade around Rs144, a fall of Rs.42, after the announcement of the revised Orbitech merger deal in October 2002. (See and )

Perhaps the only consolation for the Polaris shareholders is the 35 per cent dividend proposed for FY04.

However, Jain remains undaunted. He says that he would tackle the challenges by intellect - the collective intellect of 5,000-strong HR force as well as the company's new suite of banking products branded Intellect.

But first he explains the increase in numbers under different heads in the profit and loss account's debit side. Speaking about the Rs9.35 crore foreign exchange loss, he says, "Though we do hedge, the variations in the exchange rate were so high that we were not able to cover ourselves in full and hence the foreign exchange loss."

On the issue of loss making subsidiaries he replies that Polaris Retail Infotech will break-even this fiscal while strategic plans will be unveiled in a couple of months for the BPO subsidiary, Optimus Outsourcing. It may be recalled that Optimus Outsourcing bought out ibackoffice.com's Bangalore call centre and its US data centre in 2002. EmPower Works, an associate company (loss Rs.1.75 crore) operating in the area of human resource products is also expected to break even this fiscal. The company has signed up 20 customers for its e-branded product, Adrenaline.

The spurt in debtors account, according to Jain, is due to delayed payments from the Citi group, New York, which in turn resulted in delayed invoicing and a reduction in the company's cash position.

Polaris has no choice except to bear the delay, since 57 per cent of its business is from the Citi group. And last year, the business from Citi group grew by 30 per cent.

Explaining the benefits of the Orbitech takeover, he says that the combined turnover of the two companies was around $110 million and now the top line has grown by 30 per cent. On the other hand, Jain attributes the increases to software development, selling, marketing expenses and capitalisation of expenses to the development and branding of Intellect.

According to Jain, the investment in Intellect is expected to continue this year, but at a lower level say around Rs.24 crore, nearly half of the amount already spent. "For the last two years investors were skeptical about our strategies as they were disjointed at that time. Now the pieces are falling into their respective slots."

Intellect banking

But why Intellect, when Polaris acquired the OrbiOne suite of banking products along with Orbitech? Or is OrbiOne being rebranded as Intellect - a strategy followed by fast moving consumer goods (FMCG) companies? "OrbiOne was like an unpolished diamond. We polished it into a shining diamond," remarks Jain. The Orbi suite of banking software products were developed keeping Citi Bank in mind. To target other banks, the products had to be refurbished.

Well, Intellect had its genesis on the assumptions and the bullishness that Jain and his team felt in 2002 when Orbitech was taken over.

And last October Polaris assembled a team of 25 officials, drawn from different fields like marketing and product management to study the market and validate the corporate assumptions.

The group came back with a wealth of knowledge as to the kind of services expected by the large international banks and the size of servicing contracts offered by them. Bagging such service contracts is what would take Polaris forward.

The crack team was given ninety days to find out whether international banks would be interested in such a product. The team studied the issues between November and January and gave its report in February 2004.

Alongside Polaris decided to strengthen the product team and hired Koen Van den Brande with the mandate to grow the business from the current Rs.97.61 crore to $100 million in the next four to five years.

Brande was earlier with Microsoft as its retail banking strategist for Europe, Middle East and Africa. Prior to this, Brande was with Misys Retail Banking Systems, as director, marketing and product strategy, Dublin.

Another retail banking expert, P Sitaraman, was roped in from Standard Chartered Bank as senior vice president, product management group.

Citing a research report Brande says that during 80s and 90s many banks decided to switch over to a new core banking solution at one go and ended up facing difficulties.

"Banks have to change their core banking solution to deliver diverse services as the existing legacy ones will not be able to support any more new service offerings - a different approach have to be followed. And Intellect is all about that," he adds. The new approach he talks about is the service oriented architecture (SOA).

Going forward he says that the key differentiator between Intellect and other products is its compatability to the emerging standards called web services. Large banks are now looking at migrating towards web-based systems.

Good news followed. Even though Polaris' website states that Intellect is targeted at Asian banks while OrbiOne is slotted for Europe and the US, Polaris signed two high street deals in London. And Jain is confident of clicking a couple more soon in Europe.

According to Jain, the products division will incur a loss of Rs9 crore this year but hopes the growth would be in region of 40-50 per cent.

"We may even look at offering the product on an application software provider (ASP) model," he adds.

Polaris will also help in migrating its existing customers towards Intellect. Earlier the company used to sell another banking product called BankWare.

Services to provide the oxygen

Though the Orbitech merger catapulted Polaris into the product space, it essentially remains a banking software services major. Jain agrees that the services division will mainly contribute top line growth. Last year the services division contributed Rs548.82 crore, that is, 84.9 per cent of its total revenue.

In line with the industry trend the division showed a steady performance. The company is ramping up to meet the GE contract bagged last quarter. Polaris is also expanding its presence within the Citi Bank fold by bagging a contract from Travellor's Group last quarter. Similarly, Polaris is likely to sign a large contract with CitiBank in Europe.

Polaris also signed a joint venture agreement with plenum AG, a management consulting firm to offer IT outsourcing solutions to the German-speaking markets. The other joint venture with the American International Group Technologies a subsidiary of American International Group (AIG), AIG Systems Solutions Private Limited is also progressing well. The company has around 250 employees and the encouraging news is that AIG outfits are now positively inclined to get their IT services work done by AIG Systems Solutions.

Only recently, AIG Systems Solutions was successfully assessed for CMMI Maturity Level 3, thereby becoming one of the youngest companies to achieve this.

On the whole Jain predicts 20-25 per cent growth for Polaris. While the services division is expected to contribute around 17-22 per cent, the growth expected from the products division is between 4-5 per cent.

Can Jain deliver? Well with his Intellect, he has now borrowed time for 12 quarters.