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.
Product revenues grow by 4% YoY
n On a consolidated basis, revenues for Oracle grew by about 6% YoY.
n Product revenues rose by 4% YoY, led by higher implementation and AMC revenues.
License revenues were down by nearly 76% YoY.
n We view the lower license revenues as a result of the volatile nature of the product
revenues. These revenues vary based on completion of large product implementations
and can be very volatile.
n OFSS is also consolidating its operations in order to create a more customer-focused
organization.
n AMC revenues continued to grow and rose by 7% YoY for the quarter. AMC
revneus now form about 26% of the overall product revenues.
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 Oracle added 7 customers for its products business. 16 customers completed deployment
during the quarter.
n Services revenues de-grew by 5% QoQ.
n The business continued to witness lackluster growth. The number of employees
in the services business fell further by about 4.5% (14% fall in 1Q).
n According to the management, this was largely due to attrition. However, we
believe that, the consistent reduction could be due to the higher focus of the
company on its products business and lack of scale up in the services business.
Macro scene
n We understand that, the macro scene is still 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 healthy, according
to the management and decision making has not been impacted significantly.
n The company is witnessing strong demand trends from US but at the same time,
it is seeing some weakness in the pipeline from Western Europe.
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 lower
n Oracle booked new license orders worth $9mn ($13mn) during the quarter.
n Due to lower execution during the quarter, the tank size is at around $112mn,
we understand.
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
n On an overall basis, margins were almost flat QoQ.
n Product business margins fell steeply on a YoY basis (from 48.5% to 38.9%) on
the back of lower license revenues.
n In services business, margins rose on a YoY as well as QoQ 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.
Financial projections and Recommendation
n We almost maintain our FY12 earnings estimates with an EPS of Rs.115.
n We introduce FY13 estimates. We expect product revenues to grow by 14% and
services revenues to be almost flat YoY.
n EBIDTA margins are expected to be largely flat for the products business. We
expect license revenues to form about 20% of product revenues v/s about 19%
in FY12. Margins in services business are expected to fall on the back of salary
increments and the expected rupee appreciation v/s 2HFY12 levels.
n We expect the rupee to average 46 / USD in FY13 as compared to about 48 /
USD in 2HFY12.
n We have assumed tax at 30% of PBT in FY12 as well as in FY13. Consequently,
PAT is expected to rise by about 9% in FY13E, leading to an EPS of Rs.126.
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 valuations are not undemanding especially in the backdrop of a still uncertain
macro scene. We, thus, recommend ACCUMULATE with a revised PT of
Rs.2196 based on FY13E earnings (v/s Rs.2110 based on FY12E earnings), 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.
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.
Product revenues grow by 4% YoY
n On a consolidated basis, revenues for Oracle grew by about 6% YoY.
n Product revenues rose by 4% YoY, led by higher implementation and AMC revenues.
License revenues were down by nearly 76% YoY.
n We view the lower license revenues as a result of the volatile nature of the product
revenues. These revenues vary based on completion of large product implementations
and can be very volatile.
n OFSS is also consolidating its operations in order to create a more customer-focused
organization.
n AMC revenues continued to grow and rose by 7% YoY for the quarter. AMC
revneus now form about 26% of the overall product revenues.
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 Oracle added 7 customers for its products business. 16 customers completed deployment
during the quarter.
n Services revenues de-grew by 5% QoQ.
n The business continued to witness lackluster growth. The number of employees
in the services business fell further by about 4.5% (14% fall in 1Q).
n According to the management, this was largely due to attrition. However, we
believe that, the consistent reduction could be due to the higher focus of the
company on its products business and lack of scale up in the services business.
Macro scene
n We understand that, the macro scene is still 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 healthy, according
to the management and decision making has not been impacted significantly.
n The company is witnessing strong demand trends from US but at the same time,
it is seeing some weakness in the pipeline from Western Europe.
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 lower
n Oracle booked new license orders worth $9mn ($13mn) during the quarter.
n Due to lower execution during the quarter, the tank size is at around $112mn,
we understand.
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
n On an overall basis, margins were almost flat QoQ.
n Product business margins fell steeply on a YoY basis (from 48.5% to 38.9%) on
the back of lower license revenues.
n In services business, margins rose on a YoY as well as QoQ 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.
Financial projections and Recommendation
n We almost maintain our FY12 earnings estimates with an EPS of Rs.115.
n We introduce FY13 estimates. We expect product revenues to grow by 14% and
services revenues to be almost flat YoY.
n EBIDTA margins are expected to be largely flat for the products business. We
expect license revenues to form about 20% of product revenues v/s about 19%
in FY12. Margins in services business are expected to fall on the back of salary
increments and the expected rupee appreciation v/s 2HFY12 levels.
n We expect the rupee to average 46 / USD in FY13 as compared to about 48 /
USD in 2HFY12.
n We have assumed tax at 30% of PBT in FY12 as well as in FY13. Consequently,
PAT is expected to rise by about 9% in FY13E, leading to an EPS of Rs.126.
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 valuations are not undemanding especially in the backdrop of a still uncertain
macro scene. We, thus, recommend ACCUMULATE with a revised PT of
Rs.2196 based on FY13E earnings (v/s Rs.2110 based on FY12E earnings), 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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