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ORACLE FINANCIAL SERVICES LTD (OFSL)
RECOMMENDATION: BUY
TARGET PRICE: RS.2434
FY12E P/E: 18X
Oracle's 1QFY12 numbers were marginally lower than estimates largely due
to lower margins and higher tax expenses. Product revenues grew by 21%
YoY, which was encouraging. Services revenues were flat on a sequential
basis, partly due to the volatility associated with projects - based work.
Product EBIDTA margins were lower than expected as the company paid
hefty bonuses to employees during the quarter. The new license signings at
$13mn ($39mn) is a growth of about 80% on a YoY basis. We note that,
order and license revenue bookings are generally the weakest in April - June
quarter for Oracle. The company is seeing traction across geographies with
no major signs of budget deferrals or project cancellations. We have
tweaked our FY12E earnings. Our FY12E EPS stands at Rs.118 (Rs.124). The
YoY de-growth in PAT is largely because of the higher tax component at
30% of PBT v/s 11% in FY11E. This high tax masks a decent operational
performance. Based on the potential upside and the improved macro, we
maintain BUY, despite a fall in EPS. Our FY12E-based price target stands at
Rs.2434 (Rs.2563), 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.
Product revenues grow 21% YoY
n On a consolidated basis, revenues for Oracle grew by about 10% YoY. This was
largely due to the product revenues, which were up 21% YoY.
n On a QoQ basis, revenues were down largely because of the seasonality and
volatility associated with the products business.
n We note that, April - June revenues and order bookings are significantly lower for
Oracle as compared to Jan - March quarter, which is the last quarter of the fiscal
for it.
n We also note that, product revenues are volatile by nature and annual growth is
a better measure.
n What is also encouraging is the fact that, license revenues grew by 81% on a
YoY basis.
n Implementation revenues grew by about 6% YoY. However, the important fact
is that, AMC revenues grew by 39% YoY. There has been a consistent rise in
AMC revenues for Oracle and they have grown from Rs.1.04bn in 1QFY11 to
Rs.1.44bn in 1QFY12.
n The rise in AMC revenues is a positive as they are a stable source of revenues
and may reduce the volatility in the overall product revenues of the company.
n AMCs formed a sizeable 26% of Oracle's 1QFY12 product revenues.
n Oracle added 10 customers for its products business. 7 customer completed deployment
during the quarter.
n Services revenues were almost flat on a QoQ basis.
n The number of employees in the services business fell further by about 14% following
a 16% reduction in FY11 as a whole
n According to the management, apart from attrition (29% on a TTM basis), the
numbers reduced because of a re-grouping of some employees under the Products
business.
n We also note that, the company continued to focus on improving and sustaining
margins.
Macro scene conducive…
n We understand that, the macro scene is more uncertain as compared to the previous
quarter.
n While developed economies are showing signs of weakness, clients continue to
be sanguine about their businesses. The sentiment has remained good and
healthy, according to the management and decision making has not been impacted
significantly.
n More importantly, the discretionary spends are also sustaining 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.
Order bookings higher
n Oracle booked new license orders worth $13mn during the quarter. This is higher
than the $7mn booked in 1QFY11 but lower than the $39mn worth of orders
booked in 4QFY11. We re-iterate that, 1Q has generally been weaker v/s 4Q.
n Due to the similar level of execution during the quarter, the tank size remained
at around $110mn.
n We need to watch the order bookings closely and any further strength in the
medium term will only add to our confidence. However, we under stand that,
the volatile nature of the business may result in lower bookings in any quarter.
EBIDTA margins were lower QoQ but improved YoY
n On an overall basis, margins grew by 200bps on a YoY basis. Once again, this
was the results of higher proportion of revenues from the products business.
Product revenues formed 68% of 1QFY12 revenues as against 61% in 1QFY11.
n Margins in the products business were flat YoY at about 41%, largely because of
the annual bonuses which were paid during the quarter.
n In services, margins rose on a YoY basis, due to a reduction in employee strength
and other cost optimization initiatives.
n Oracle's margins in the services business have been surprisingly erratic, making it
difficult to estimates the future trend.
n We believe that, a higher proportion of license revenues will be a key determinant
of margins going forward.
n The company plans to increase salaries by an average of about 10% for its employees
WEF August 2011 (in line with the fiscal start for the Parent).
Financial projections and Recommendation
n We have tweaked our earnings estimates for FY12.
n We expect the company to report revenues of Rs.32.9bn in FY12.
n Product revenues are expected to grow by 16% in FY12. Increased spends
should help higher growth. Services revenues are expected to remain flat in
FY12.
n EBIDTA margins are expected to moderate from the levels of FY11, largely due
to the expected rupee appreciation and salary increments.
n Oracle 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.44.5/USD till end FY12. We expect a
PAT of Rs.9.9bn in FY12E.
n Growth in FY12 is expected to be impacted because of the higher tax rates at
30% v/s 11% in FY11 in the absence of tax cover. PBT is expected to rise by
about 14% YoY 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 FY12.
n Thus, despite the expected fall in profits in FY12 and relatively high valuations,
we maintain a BUY on the stock with a revised PT of Rs.2434 (Rs.2563), after
according a 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.2434
FY12E P/E: 18X
Oracle's 1QFY12 numbers were marginally lower than estimates largely due
to lower margins and higher tax expenses. Product revenues grew by 21%
YoY, which was encouraging. Services revenues were flat on a sequential
basis, partly due to the volatility associated with projects - based work.
Product EBIDTA margins were lower than expected as the company paid
hefty bonuses to employees during the quarter. The new license signings at
$13mn ($39mn) is a growth of about 80% on a YoY basis. We note that,
order and license revenue bookings are generally the weakest in April - June
quarter for Oracle. The company is seeing traction across geographies with
no major signs of budget deferrals or project cancellations. We have
tweaked our FY12E earnings. Our FY12E EPS stands at Rs.118 (Rs.124). The
YoY de-growth in PAT is largely because of the higher tax component at
30% of PBT v/s 11% in FY11E. This high tax masks a decent operational
performance. Based on the potential upside and the improved macro, we
maintain BUY, despite a fall in EPS. Our FY12E-based price target stands at
Rs.2434 (Rs.2563), 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.
Product revenues grow 21% YoY
n On a consolidated basis, revenues for Oracle grew by about 10% YoY. This was
largely due to the product revenues, which were up 21% YoY.
n On a QoQ basis, revenues were down largely because of the seasonality and
volatility associated with the products business.
n We note that, April - June revenues and order bookings are significantly lower for
Oracle as compared to Jan - March quarter, which is the last quarter of the fiscal
for it.
n We also note that, product revenues are volatile by nature and annual growth is
a better measure.
n What is also encouraging is the fact that, license revenues grew by 81% on a
YoY basis.
n Implementation revenues grew by about 6% YoY. However, the important fact
is that, AMC revenues grew by 39% YoY. There has been a consistent rise in
AMC revenues for Oracle and they have grown from Rs.1.04bn in 1QFY11 to
Rs.1.44bn in 1QFY12.
n The rise in AMC revenues is a positive as they are a stable source of revenues
and may reduce the volatility in the overall product revenues of the company.
n AMCs formed a sizeable 26% of Oracle's 1QFY12 product revenues.
n Oracle added 10 customers for its products business. 7 customer completed deployment
during the quarter.
n Services revenues were almost flat on a QoQ basis.
n The number of employees in the services business fell further by about 14% following
a 16% reduction in FY11 as a whole
n According to the management, apart from attrition (29% on a TTM basis), the
numbers reduced because of a re-grouping of some employees under the Products
business.
n We also note that, the company continued to focus on improving and sustaining
margins.
Macro scene conducive…
n We understand that, the macro scene is more uncertain as compared to the previous
quarter.
n While developed economies are showing signs of weakness, clients continue to
be sanguine about their businesses. The sentiment has remained good and
healthy, according to the management and decision making has not been impacted
significantly.
n More importantly, the discretionary spends are also sustaining 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.
Order bookings higher
n Oracle booked new license orders worth $13mn during the quarter. This is higher
than the $7mn booked in 1QFY11 but lower than the $39mn worth of orders
booked in 4QFY11. We re-iterate that, 1Q has generally been weaker v/s 4Q.
n Due to the similar level of execution during the quarter, the tank size remained
at around $110mn.
n We need to watch the order bookings closely and any further strength in the
medium term will only add to our confidence. However, we under stand that,
the volatile nature of the business may result in lower bookings in any quarter.
EBIDTA margins were lower QoQ but improved YoY
n On an overall basis, margins grew by 200bps on a YoY basis. Once again, this
was the results of higher proportion of revenues from the products business.
Product revenues formed 68% of 1QFY12 revenues as against 61% in 1QFY11.
n Margins in the products business were flat YoY at about 41%, largely because of
the annual bonuses which were paid during the quarter.
n In services, margins rose on a YoY basis, due to a reduction in employee strength
and other cost optimization initiatives.
n Oracle's margins in the services business have been surprisingly erratic, making it
difficult to estimates the future trend.
n We believe that, a higher proportion of license revenues will be a key determinant
of margins going forward.
n The company plans to increase salaries by an average of about 10% for its employees
WEF August 2011 (in line with the fiscal start for the Parent).
Financial projections and Recommendation
n We have tweaked our earnings estimates for FY12.
n We expect the company to report revenues of Rs.32.9bn in FY12.
n Product revenues are expected to grow by 16% in FY12. Increased spends
should help higher growth. Services revenues are expected to remain flat in
FY12.
n EBIDTA margins are expected to moderate from the levels of FY11, largely due
to the expected rupee appreciation and salary increments.
n Oracle 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.44.5/USD till end FY12. We expect a
PAT of Rs.9.9bn in FY12E.
n Growth in FY12 is expected to be impacted because of the higher tax rates at
30% v/s 11% in FY11 in the absence of tax cover. PBT is expected to rise by
about 14% YoY 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 FY12.
n Thus, despite the expected fall in profits in FY12 and relatively high valuations,
we maintain a BUY on the stock with a revised PT of Rs.2434 (Rs.2563), after
according a 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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