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ORACLE FINANCIAL SERVICES LTD (OFSL)
RECOMMENDATION: BUY
TARGET PRICE: RS.2510
FY12E P/E: 18.4X
Oracle's 3QFY10 results beat our estimates. However, we note that, Oracle's
results have been volatile over quarters. Product revenues were flat YoY
after having risen by 18% YoY in 2Q. Services revenues rose by 15% QoQ,
once again due to the volatility associated with projects - based work.
EBIDTA margins provided a surprise as they rose by 230bps QoQ largely due
to rise in services revenues. The new license signings at $14mn, though
lower than $24mn of the previous quarter indicates continued traction in
order booking and reflects a likely revival in spending by clients, as
indicated by larger peers also.
The company is seeing traction across geographies with EMEA witnessing momentum along with USA. We have tweaked our FY11E and FY12E earnings. For FY11E we estimate the EPS to
be Rs.117 (Rs.109 earlier). Our FY12E EPS stands at Rs.115, largely because of
the higher tax component at 21% of PBT v/s 13% in FY11E. This high tax
shields a decent operational performance with EBIT expected to rise by 10%
YoY in that fiscal. The stock has corrected of late based on the news of a
suit filed by a client bank. We do not expect any major financial impact on
the company, atleast in the near term. Based on the potential upside and
the improved macro, we upgrade the stock to BUY v/s ACCUMULATE earlier,
despite a fall in EPS. Our FY12E-based price target stands at Rs.2510
(Rs.2561), after according a discount to larger peers. While valuations are
not un-demanding, we believe that, these can be sustained in view of the
improving macro scene and earnings growth. There can be potential gains
from Oracle's offer, if any, to buy-back shares and de-list the company. A
delayed recovery in user economies and a sharper-than-expected rupee
appreciation are key risks to our earnings estimates.
Revenues - services revenues growth surprises
n Revenues for the quarter were almost flat on a YoY and QoQ basis.
n Growth was boosted by a 15% rise in services revenues QoQ. The YoY growth in
services revenues was 8%.
n The strong QoQ growth in services revenues was due to scale up in some of the
existing accounts.
n However, we understand that, the projects based nature of the revenues also
helped with a few milestones being reached during the quarter, we believe.
Oracle added 6 new customers in the services business.
n The number of employees in the services business fell further by about 3% on
top of the 5% reduction witnessed in the previous quarter and 7% reduction in
1Q. This was surprising, especially in the backdrop of significant additions made
by most peers.
n The company continued to focus on improving and sustaining margins.
n Product revenues remained flat YoY but fell by about 8% on a sequential basis.
n In 2Q, revenues had grown by 26% QoQ and 18% YoY.
n Thus, the volatility associated with the product revenues impacted growth in 3Q
and this may not be representative of future growth rates.
n For 9mFY11, product revenues have grown by 2%, partly impacted by the rupee
appreciation and partly by moderation in discretionary spends.
n License revenues fell by 34% YoY after having risen 4x in 2Q.
n Implementation revenues grew 6% YoY whereas AMC revenues grew by 15%
over the period.
n The rise in AMC revenues is a positive as AMC revenues are a stable source of
revenues and may reduce the volatility in the overall product revenues of the
company.
n AMCs now form a sizeable 28% of Oracle's product revenues.
Macro scene conducive…
n We understand that, the macro scene had improved further in 3QFY11 as compared
to the previous quarter.
n With developed economies showing signs of stability and some growth, clients
are more confident about their businesses. The sentiment had thus improved
among clients and decision making is faster than earlier.
n More importantly, the discretionary spends are also seeing a pick up and that
should have a direct positive impact on order bookings for Oracle.
n According to the management, the transformation agenda of the clients, which
was suspended, is being revived by clients. Moreover, compliance programs of
clients are driving growth for products like Reveleus.
n Oracle launched the Reveleus Liquidity Risk Management product as a part of its
Financial Services Analytical Applications suite. This product facilitates compliance
including compliance with Basel III liquidity provisions.
n 8 customer projects "went live" during the quarter with OFSL products and 12
new product customers were added.
Order bookings lower but trend is bullish
n The overall improvement in the macro scene has been reflected in order bookings.
n Oracle booked new license orders worth $14mn during the quarter. This is lower
than the $24mn booked in 2Q. 2Q order booking was in line with the average
bookings of the past few quarters, barring 1Q.
n The average quarterly bookings for 9mFY11 were $15mn, which is encouraging.
n Due to the moderation in bookings, the tank size likely fell to about $109mn v/
s $111mn QoQ.
n We need to watch the order bookings closely and any further weakness will be
negative for the future growth of the company.
EBIDTA margins were higher QoQ
n On an overall basis, margins grew by 230bps on a sequential basis. Once again,
this was the results of higher services revenues.
n Margins in the services business rose QoQ by 1370bps as milestone related revenue
recognition helped profitability. Revenues rose despite a fall in number of
employees QoQ.
n In products, margins fell marginally to 47.4% on the back of lower contribution
of license revenues during the quarter.
n Oracle's margins in the services business have been surprisingly erratic, making it
difficult to estimates the future trend.
n We understand that, the product margins (EBIDTA margins at 47.4%) are unsustainable.
We had already assumed a moderation in margins in 4QFY11 and in
FY12E.
n We believe that, a higher proportion of license revenues will be a key determinant
of margins going forward.
Financials and Recommendation
n We have tweaked our earnings estimates for FY11 and FY12 estimates.
n We expect the company to report revenues of Rs.29.6bn in FY11 and Rs.33.6bn
in FY12.
n Product revenues are expected to grow by about 4% to Rs.19.4bn in FY11 and
by 16% in FY12. Improved sentiments and spends should help higher growth.
Services revenues are expected to grow by 3% in FY11 and about 10% in FY12.
n EBIDTA margins are expected to moderate from the high levels of 3QFY11,
largely due to the expected rupee appreciation and salary increments.
n Oracle is getting new people and is setting up a new Tier I sales organization.
These factors may have an impact on the margins in the immediate future.
n We have assumed the rupee to be at Rs.45 / USD till end FY12.
n We expect a PAT of Rs.9.8bn and Rs.9.6bn in FY11E and FY12E, respectively.
n Growth in FY12 is expected to be impacted because of the higher tax rates.
n In the absence of tax cover, we have assumed tax rate to rise from 13% in FY11
to 21% in FY12.
Recommendation
n We see the Oracle relationship as a key differentiator for OFSL and believe this
could open up significant business opportunities for the company in addition to
having endowed it with an MNC parentage.
n The macro scene has also improved and this is expected to lead to better growth
rates in FY11 / FY12.
n Thus, despite the expected fall in profits in FY12 and relatively high valuations,
we recommend a BUY (ACCUMULATE) on the stock with a revised PT of
Rs.2511 (Rs.2561), after according a marginal discount as compared to valuations
of large peers.
n We note that, the quarterly earnings are pretty volatile and may surprise on either
side.
n A revised open offer by Oracle, if any, with a view to increase its stake further
and de-list the stock from the bourses, will be an upside trigger, though we assign
low probability to the same, for now.
Risks
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in the rupee beyond our estimates may impact our earnings
estimates for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ORACLE FINANCIAL SERVICES LTD (OFSL)
RECOMMENDATION: BUY
TARGET PRICE: RS.2510
FY12E P/E: 18.4X
Oracle's 3QFY10 results beat our estimates. However, we note that, Oracle's
results have been volatile over quarters. Product revenues were flat YoY
after having risen by 18% YoY in 2Q. Services revenues rose by 15% QoQ,
once again due to the volatility associated with projects - based work.
EBIDTA margins provided a surprise as they rose by 230bps QoQ largely due
to rise in services revenues. The new license signings at $14mn, though
lower than $24mn of the previous quarter indicates continued traction in
order booking and reflects a likely revival in spending by clients, as
indicated by larger peers also.
The company is seeing traction across geographies with EMEA witnessing momentum along with USA. We have tweaked our FY11E and FY12E earnings. For FY11E we estimate the EPS to
be Rs.117 (Rs.109 earlier). Our FY12E EPS stands at Rs.115, largely because of
the higher tax component at 21% of PBT v/s 13% in FY11E. This high tax
shields a decent operational performance with EBIT expected to rise by 10%
YoY in that fiscal. The stock has corrected of late based on the news of a
suit filed by a client bank. We do not expect any major financial impact on
the company, atleast in the near term. Based on the potential upside and
the improved macro, we upgrade the stock to BUY v/s ACCUMULATE earlier,
despite a fall in EPS. Our FY12E-based price target stands at Rs.2510
(Rs.2561), after according a discount to larger peers. While valuations are
not un-demanding, we believe that, these can be sustained in view of the
improving macro scene and earnings growth. There can be potential gains
from Oracle's offer, if any, to buy-back shares and de-list the company. A
delayed recovery in user economies and a sharper-than-expected rupee
appreciation are key risks to our earnings estimates.
Revenues - services revenues growth surprises
n Revenues for the quarter were almost flat on a YoY and QoQ basis.
n Growth was boosted by a 15% rise in services revenues QoQ. The YoY growth in
services revenues was 8%.
n The strong QoQ growth in services revenues was due to scale up in some of the
existing accounts.
n However, we understand that, the projects based nature of the revenues also
helped with a few milestones being reached during the quarter, we believe.
Oracle added 6 new customers in the services business.
n The number of employees in the services business fell further by about 3% on
top of the 5% reduction witnessed in the previous quarter and 7% reduction in
1Q. This was surprising, especially in the backdrop of significant additions made
by most peers.
n The company continued to focus on improving and sustaining margins.
n Product revenues remained flat YoY but fell by about 8% on a sequential basis.
n In 2Q, revenues had grown by 26% QoQ and 18% YoY.
n Thus, the volatility associated with the product revenues impacted growth in 3Q
and this may not be representative of future growth rates.
n For 9mFY11, product revenues have grown by 2%, partly impacted by the rupee
appreciation and partly by moderation in discretionary spends.
n License revenues fell by 34% YoY after having risen 4x in 2Q.
n Implementation revenues grew 6% YoY whereas AMC revenues grew by 15%
over the period.
n The rise in AMC revenues is a positive as AMC revenues are a stable source of
revenues and may reduce the volatility in the overall product revenues of the
company.
n AMCs now form a sizeable 28% of Oracle's product revenues.
Macro scene conducive…
n We understand that, the macro scene had improved further in 3QFY11 as compared
to the previous quarter.
n With developed economies showing signs of stability and some growth, clients
are more confident about their businesses. The sentiment had thus improved
among clients and decision making is faster than earlier.
n More importantly, the discretionary spends are also seeing a pick up and that
should have a direct positive impact on order bookings for Oracle.
n According to the management, the transformation agenda of the clients, which
was suspended, is being revived by clients. Moreover, compliance programs of
clients are driving growth for products like Reveleus.
n Oracle launched the Reveleus Liquidity Risk Management product as a part of its
Financial Services Analytical Applications suite. This product facilitates compliance
including compliance with Basel III liquidity provisions.
n 8 customer projects "went live" during the quarter with OFSL products and 12
new product customers were added.
Order bookings lower but trend is bullish
n The overall improvement in the macro scene has been reflected in order bookings.
n Oracle booked new license orders worth $14mn during the quarter. This is lower
than the $24mn booked in 2Q. 2Q order booking was in line with the average
bookings of the past few quarters, barring 1Q.
n The average quarterly bookings for 9mFY11 were $15mn, which is encouraging.
n Due to the moderation in bookings, the tank size likely fell to about $109mn v/
s $111mn QoQ.
n We need to watch the order bookings closely and any further weakness will be
negative for the future growth of the company.
EBIDTA margins were higher QoQ
n On an overall basis, margins grew by 230bps on a sequential basis. Once again,
this was the results of higher services revenues.
n Margins in the services business rose QoQ by 1370bps as milestone related revenue
recognition helped profitability. Revenues rose despite a fall in number of
employees QoQ.
n In products, margins fell marginally to 47.4% on the back of lower contribution
of license revenues during the quarter.
n Oracle's margins in the services business have been surprisingly erratic, making it
difficult to estimates the future trend.
n We understand that, the product margins (EBIDTA margins at 47.4%) are unsustainable.
We had already assumed a moderation in margins in 4QFY11 and in
FY12E.
n We believe that, a higher proportion of license revenues will be a key determinant
of margins going forward.
Financials and Recommendation
n We have tweaked our earnings estimates for FY11 and FY12 estimates.
n We expect the company to report revenues of Rs.29.6bn in FY11 and Rs.33.6bn
in FY12.
n Product revenues are expected to grow by about 4% to Rs.19.4bn in FY11 and
by 16% in FY12. Improved sentiments and spends should help higher growth.
Services revenues are expected to grow by 3% in FY11 and about 10% in FY12.
n EBIDTA margins are expected to moderate from the high levels of 3QFY11,
largely due to the expected rupee appreciation and salary increments.
n Oracle is getting new people and is setting up a new Tier I sales organization.
These factors may have an impact on the margins in the immediate future.
n We have assumed the rupee to be at Rs.45 / USD till end FY12.
n We expect a PAT of Rs.9.8bn and Rs.9.6bn in FY11E and FY12E, respectively.
n Growth in FY12 is expected to be impacted because of the higher tax rates.
n In the absence of tax cover, we have assumed tax rate to rise from 13% in FY11
to 21% in FY12.
Recommendation
n We see the Oracle relationship as a key differentiator for OFSL and believe this
could open up significant business opportunities for the company in addition to
having endowed it with an MNC parentage.
n The macro scene has also improved and this is expected to lead to better growth
rates in FY11 / FY12.
n Thus, despite the expected fall in profits in FY12 and relatively high valuations,
we recommend a BUY (ACCUMULATE) on the stock with a revised PT of
Rs.2511 (Rs.2561), after according a marginal discount as compared to valuations
of large peers.
n We note that, the quarterly earnings are pretty volatile and may surprise on either
side.
n A revised open offer by Oracle, if any, with a view to increase its stake further
and de-list the stock from the bourses, will be an upside trigger, though we assign
low probability to the same, for now.
Risks
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in the rupee beyond our estimates may impact our earnings
estimates for the company.
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