Pipeline improving but little clarity on cash usage
We met Oracle Financial Services (OFSS) CFO Makrand Padalkar recently.
Key takeaways of our meeting: 1) demand is looking up in terms of pipeline,
which should help drive some pickup in license sales; 2) the new Banking
Platform should drive traction in large complex transformational deals; and 3)
margins are a key management focus. Additionally, we don’t see any concrete
steps for cash utilization toward the business or in terms of shareholder
returns in the near-term. Valuations are expensive at 20x FY15E PE; SELL.
Focus on driving new license growth, pipeline improving:While OFSS has seen
sluggish new license sales in 1HFY14, management did indicate that new license sales
remains their top focus. The company’s pipeline is improving, although Europe
remains sluggish. Further they remain confident of the new Oracle Banking Platform,
a comprehensive suite that integrates Oracle’s other enterprise software offerings
including CRM, ERP, HRM etc. As such this platform significantly enhances the
capability of Flexcube and should enable OFSS to addressthe large global banks which
have highly complex legacy systems.
Margins a key focus for management: Blended EBIT margins have been in a healthy
range of 35-36% for 1HFY14, aided by the INR depreciation. Management continues
to keep a sharp focus on maintaining the margin profile, including keepingmargins
in the services business at current levels (c.20%). On cash usage(Rs59bn in 2QFY14),
management indicated acquisitions to strengthen their platform, but we see
nothing executable near-term. As such, appropriate cash usage is a concern for us.
Expensive – SELL:OFSS is trading at 20x FY15E (Mar ended) PE, a premium to its
large-cap peers in India. While initial feedback suggests some improvement in the
deal pipeline, we do not see any significant upgrades to our current 12% license
growth for FY15 yet. We value OFSS at 16x fwd PE to arrive at our Dec’14 TP of
Rs2,600. Maintain SELL given expensive valuations and a weak growth outlook
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We met Oracle Financial Services (OFSS) CFO Makrand Padalkar recently.
Key takeaways of our meeting: 1) demand is looking up in terms of pipeline,
which should help drive some pickup in license sales; 2) the new Banking
Platform should drive traction in large complex transformational deals; and 3)
margins are a key management focus. Additionally, we don’t see any concrete
steps for cash utilization toward the business or in terms of shareholder
returns in the near-term. Valuations are expensive at 20x FY15E PE; SELL.
Focus on driving new license growth, pipeline improving:While OFSS has seen
sluggish new license sales in 1HFY14, management did indicate that new license sales
remains their top focus. The company’s pipeline is improving, although Europe
remains sluggish. Further they remain confident of the new Oracle Banking Platform,
a comprehensive suite that integrates Oracle’s other enterprise software offerings
including CRM, ERP, HRM etc. As such this platform significantly enhances the
capability of Flexcube and should enable OFSS to addressthe large global banks which
have highly complex legacy systems.
Margins a key focus for management: Blended EBIT margins have been in a healthy
range of 35-36% for 1HFY14, aided by the INR depreciation. Management continues
to keep a sharp focus on maintaining the margin profile, including keepingmargins
in the services business at current levels (c.20%). On cash usage(Rs59bn in 2QFY14),
management indicated acquisitions to strengthen their platform, but we see
nothing executable near-term. As such, appropriate cash usage is a concern for us.
Expensive – SELL:OFSS is trading at 20x FY15E (Mar ended) PE, a premium to its
large-cap peers in India. While initial feedback suggests some improvement in the
deal pipeline, we do not see any significant upgrades to our current 12% license
growth for FY15 yet. We value OFSS at 16x fwd PE to arrive at our Dec’14 TP of
Rs2,600. Maintain SELL given expensive valuations and a weak growth outlook
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