Oracle Financial Services: religare research,

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

Investment Focus - Oracle Financial: A defensive buy :: Business Line

Technicals: Bajaj Auto, Wockhardt, Coal India, Shree Renuka Sugars, Swaraj Engines, Oracle Financial :: Business Line

Sizzling Stocks: Jet Airways, Oracle Financial :: Business Line

 

Oracle Financial Services: Hold ::Business Line

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.

Sizzling stocks - Oracle Fin Serv; Godrej Ind ::Business Line

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Oracle Fin Serv (Rs 2,583)

On Friday, the stock skyrocketed 16 per cent with heavy volume, emphatically breaking through multiple key resistances. With these gains, the stock has advanced almost 19 per cent for the week. The daily indicators and oscillators of the stock are featuring in the overbought area, signalling a potential corrective decline or a pause in the current uptrend. The stock is hovering well above its daily Bollinger Bands implying that a near-term corrective decline is on the cards. Moreover, the stock is facing significant long-term resistance at Rs 2,630.

Short-term declines can find supports at Rs 2,460, Rs 2,400 and Rs 2,350. Subsequently, important medium-term support is at Rs 2,200. A strong weekly close below Rs 2,150 will mar the stock's medium-term uptrend and pull it lower to Rs 1,940.

On the other hand, decisive rally above Rs 2,630 will lift the stock higher to Rs 2,700 and Rs 2,800 in the medium-term.

Godrej Industries (Rs 250.7)

The stock zoomed 16.4 per cent with extraordinary weekly volumes in the previous week. But the stock is currently testing key resistance at around Rs 247, its September 2010 peak. Its daily relative strength index and moving average convergence divergence indicator are hovering in the overbought territory implying a near-term correction. Further, the stock has breached the upper boundary of the daily Bollinger Bands which indicates overbought position.

Therefore, a downward reversal from the current resistance level will pull the stock down to Rs 230 and then to Rs 210 in the short-term. Next significant supports below Rs 210 are at Rs 180 and Rs 165 levels.

Conclusive breakthrough of the resistance level of Rs 248 in the medium-term can lift the stock northwards to Rs 265 and to Rs 292.

Accumulate ORACLE FINANCIAL SERVICES:; Targe: RS.2196 : Kotak Sec,

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ORACLE FINANCIAL SERVICES LTD (OFSL)
PRICE: RS.2100 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.2196 FY13E P/E: 16.7X
Oracle's 2QFY12 numbers were lower than estimates largely due to lower
product revenues and margins. We believe this could be because of the
volatile nature of product revenues. Product revenues rose by 4% YoY and
9% QoQ. The new license signings at $9mn ($13mn) was lower QoQ. The
management has indicated strong pipeline for the products business with
US providing much of the strength. The company is not seeing in major
signs of budget deferrals or project cancellations. Services business
continued to lose employees during the quarter, though. We largely
maintain our FY12E earnings at Rs.115 per share. We introduce FY13
earnings estimates where we expect the EPS to be Rs.126. We arrive at a
target price of Rs.2196 based on FY13E earnings (Rs.2110 based on FY12E
earnings, earlier). Based on the limited upsides, we recommend
ACCUMULATE. 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.

Oracle Financial Services Software -Strong outlook continues ::Standard Chartered Research

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 License fees declined 42% qoq on inherent product
business volatility given push out of deal closures to 3Q12
with AMC revenue (-9% qoq) also impacted by delayed
bookings; IT services business restructuring continues.
 Consolidated margins expanded 61bp qoq despite 15%
offshore wage hike aided by 8% INR depreciation, flow
through BPO revenue and increased IT services offshoring.
 We believe continued product business hiring (7% qoq) is
an indicator of strong growth visibility despite muted 2Q
signings (US$9m); management indicated robust pipeline
and expects to match FY11 license revenue growth.
 Retain Outperform with no changes to our estimates.

Oracle Financial, :Target Price: Rs.2434 :: Kotak Sec,

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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.

Oracle Financial Services Software: Buy :: Business Line

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The revival in software companies' fortunes has been led by the banking and the financial services (BFS) segment, as clients enhance IT spends, especially of the discretionary variety.

In this light, investors with a two-year horizon can buy the shares of Oracle Financial Services Software (Oracle Financial), an IT products and services company focussed on the BFS sector.

A healthy service-mix tilting towards high-margin products, a well-diversified geographic spread, apart from improvement in key metrics leading to optimisation of costs, are positives for the company. At Rs 2,183, the share trades at 14 times its likely FY-13 earnings. This is at a steep discount to most top-tier IT players, despite the company enjoying comparable or better margins. The cash per share (at Rs 345) is more than 15 per cent of the current stock price, giving further cushion to our recommendation.

In FY-11, Oracle Financial saw its revenues grow by 4.3 per cent to Rs 2,997 crore, while net profits grew by 43.6 per cent to Rs 1,111 crore, aided by Rs 139 crore in the form of interest income and Rs 22.7 crore of forex gains. In the previous fiscal, there was heavy forex loss and lower interest income. But even without the ‘other income' component, the profit growth has been healthy. The company has consistently managed an operating profit margin of over 30 per cent and a net margin of close to 25 per cent, among the best in the industry. After a dip in the first quarter of last fiscal, the revenue growth has been stable in the subsequent quarters, with the March quarter registering a 14.2 percent increase in the top-line.

Recent indications from the management on continued listing allay management fears on the company being delisted.

PRODUCTS OFFERING

Oracle Financial derives 67 per cent of its revenues from its products offering, which is a high margin business. About 31 per cent comes from services such as implementation and maintenance. Both these segments have grown by about five per cent last fiscal. In fact, revenues from new licences are up over 22 per cent in FY-11. It needs to be noted that once the products business expands, the services component would grow at a faster clip and generate steady annuity revenues. Implementation or professional services and maintenance revenues too grew at a healthy pace.

This makes for a very favourable service-mix that has allowed the company to enjoy stronger margins. The company has a well-diversified geographic-mix with North America (31 per cent of revenues), Europe (26 per cent), Asia-Pacific (25 per cent) and the MEA region (19 per cent) being the important ones. This makes Oracle Financial less dependent on any specific geography and also allows it to benefit from rapidly growing regions such as West Asia and Asia-Pacific.

For example, the demand for its products is spread more or less evenly across regions, though in terms of services, North America leads the way, which is in line with the trend for Indian offshore entities. In this regard, the company also benefits from the association of its parent, Oracle Corporation, which allows it to tap new clients as well.

KEY METRICS IMPROVE

All its top customers, which includes Citigroup and its entities, have ramped up spends, as a result of which revenue contribution from these clients are up.

The deal pipeline too is quite healthy for Oracle Financial, with 22 new customers being added in its products business and four in its services segment in the recent quarter.

The demand for products, again, is well spread across regions and sub-segments such as core banking, analytics, treasury, risk management and the like.

In terms of managing costs and realisations too, the company has made strides.

In its services business, the company has increased focus on fixed-price deals, which ensure better realisations compared to time and material projects.

Such projects are up a couple of percentage points to 36 percent of services revenues. Oracle Financial has also increased its offshore presence by a couple of percentage points to 52 per cent in FY-11, which would optimise costs.

Although still nascent, the products of companies, such as Infosys and TCS, might bring some pricing pressure on Oracle Financial's products.

Attrition, at over 30 percent, is a key execution risk for the company.

Buy ORACLE FINANCIAL SERVICES : Target Rs 2,510 ; Kotak Sec

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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.