Oracle Financial Services - Witnessing initial signs of demand pick-up; visit note; Edelweiss PDF link

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Oracle Financial Services (OFSS IN, INR 2,585, Not Rated)

We recently met the management of Oracle Financial Services (OFSS) for business update and understanding the strategy going forward. OFSS is a leading software provider to BFS clients. ‘FLEXCUBE’, its flagship core banking product, has been among the top 2 selling banking software products. Key takeaways – a) It is witnessing initial signs of demand pick- up for its products – improved pipeline and sales activity, b) margins remain key focus in services business (revenue decline may continue) but margins to be stable, and c) Q4 will continue to be seasonally strong.

BFSI focused product-led business model

OFSS, with its strong product portfolio and marquee parentage, is poised to benefit from the revival in CBS replacement demand. While spending in FY12 on new licenses has been modest, management has indicated pockets of opportunities and improved deal pipeline particularly in North America and Asia. We believe the muted growth over FY09-11 has been due to two reasons: a) overall pressure on IT spent in the BFSI vertical and b) discretionary nature of spend that OFSS caters to.

Margin a clear focus in services business

Within services i.e. IT and BPO (30% of revenues), OFSS has been consciously reducing focus on the low-margin segments including implementation. Reasons being: One, its parent (Oracle) lays significant importance to high-margin business and second, the company intends to leave all low-margin (~15%) work for partners who aid product sales. Its current revenue portfolio on services side is USD175mn. Despite this smaller scale, EBITDA margins at 27-28% are comparable to tier-1 vendors.

Outlook and valuations: Performance to improve; Not Rated

Success in the US through large core banking deal win could offer OFSS the next leg of growth, rendering it strong referencing capability. Further, we expect the company to remain immune to pricing pressure given its higher focus on products and strong parentage. At CMP of INR2585, the stock is trading at P/E of 20.5x and 18.7x FY12E and FY13E, consensus earnings, respectively. We believe delisting premium is partly getting build into the share price given Oracle’s ownership of 80.4% and the minimum 25% public shareholding criterion leading to the belief that Oracle may chose to delist.

Oracle Financial Services - Witnessing initial signs of demand pick-up; visit note; Not Rated

Regards,