ORACLE FINANCIAL SERVICES LTD (OFSL)
PRICE: RS.2060 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.2247 FY11E P/E: 16.2X
Results below expectations; Maintain ACCUMULATE
Results for 2QFY10 were below expectations, mainly due to lower-thanestimated
revenues. A further 16% QoQ fall in the license revenues
contributed to the revenue shortfall v/s expectations. We had anticipated
growth after the 70% fall experienced in 1QFY10. Margins fell QoQ largely
due to the lower license revenues and also services revenues. While the
demand scenario has eased QoQ, order flows have remained muted.
Sustainability of annual growth rates and margins is critical, in our opinion.
We tweak FY10 EPS estimate to Rs.107 (Rs.111 earlier). We also introduce
FY11 estimates and expect EPS to rise to Rs.127. We note valuations are not
un-demanding and there can be potential gains from Oracle's offer, if any,
to buy-back shares and de-list the company. We maintain ACCUMULATE
due to the sharp run-up in stock price and the continuing uncertainty on
macro environment (and potential impact on the BFSI segment). Price
target is at 2247 (Rs.1644 based on FY10 earnings) based on FY11 earnings
estimates. A delayed recovery in user economies and a sharper-thanexpected
rupee appreciation are key risks to our earnings estimates.
2QFY10 results
(Rs mn) 1QFY10 2QFY10 % QoQ 2QFY09 % YoY
Revenues 7100 6790 -4.4 7074 -4.0
Expenditure 4744 4796 5878
EBIDTA 2356 1994 -15.4 1196 66.7
Depreciation 127 131 138
EBIT 2229 1863 -16.4 1058 76.1
Interest 0 0 0
Other inc -204 349 440
PBT 2024 2212 9.3 1498 47.7
Tax 165 167 91
PAT 1860 2046 10.0 1407 45.4
Share of Pft / (loss) -1 0 -5
Adjusted PAT 1859 2046 10.1 1402 45.9
E.O items 0 0 469
EPS (Rs) 22.2 24.4 16.7
Margins
OPM (%) 33.2 29.4 16.9
GPM(%) 31.4 27.4 15.0
NPM(%) 26.2 30.1 19.8
Source : Company
Summary table
(Rs mn) FY09 FY10E FY11E
Sales 29,354 31,060 36,479
Growth (%) 22.4 5.8 17.4
EBITDA 7,755 9,677 10,950
EBITDA margin (%) 26.4 31.2 30.0
Net profit 8,125 8,987 10,624
Net cash (debt) 15,490 26,142 33,902
EPS (Rs) 97.0 107.3 126.8
Growth (%) 92.9 10.6 18.2
CEPS 103.9 113.8 133.7
DPS (Rs) 6.0 6.0 6.0
ROE (%) 25.9 22.9 21.9
ROCE (%) 28.6 25.5 24.9
M Cap/Sales (x) 5.9 5.6 4.7
EV/EBITDA (x) 22.3 17.8 15.8
P/E (x) 21.2 19.2 16.2
P/Cash Earnings 19.8 18.1 15.4
P/BV (x) 4.9 4.0 3.2
Source: Company, Kotak Securities - Private
Client Research
Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
MORNING INSIGHT November 6, 2009
Revenues lower
n Revenues for the quarter fell by about 4% QoQ and also YoY.
n Product revenues were lower by about 4% QoQ and down by about 3% YoY.
This was largely due to the lower license revenues. They fell by 14% QoQ on
top of a near 70% fall witnessed in 1QFY10.
n This came as a negative surprise for us. We were expecting a sequential growth
in license revenues.
n According to the management, this was due to milestones issues. Several milestones
are expected to be reached in the next quarter.
n The initial license fees signed on during the quarter amounted to $7mn, flat as
against $7mn in the previous quarter.
n The low level of order bookings is of concern to us and this may impact revenues
in future quarters.
n However, the management is confident of bagging new orders in due course as
the pipeline is pretty strong and projects are being awarded because of a more
benign macro environment.
n The tank size (order book for license revenues) stood at $118mn as at 2QFY10
end as compared to about the same figure as at the end of the previous quarter.
n During the quarter, 12 new name customers were added on an overall basis. 20
customer sites went live during the quarter.
n Services revenues were lower by 7% QoQ. We believe that, this was also largely
due to milestone related issues. Revenues from fixed price projects fell to 27%
of services revenues as compared to 32% in the previous quarter.
n Revenues also likely suffered as the company focused more on maintaining
margins rather than pursuing growth rates.
n The number of employees in this business fell further by 378 to 3874 (reduction
of 307 in previous quarter). This is the seventh successive quarter where employee
numbers have reduced QoQ in this business.
n The management expects employee numbers to further come down.
n The utlisation level is expected to rise to about 75% as compared to 71% in
1QFY10.
n KPO revenues grew by 8% QoQ, albeit on a small base of Rs.226mn.
EBIDTA margins were lower QoQ
n On an overall basis, margins were lower QoQ at 29.4% (33.2% in 1QFY10). We
had expected margins to be higher.
n Margins were lower in all the three businesses. However, the major impact
came from the products business which saw margins fall by about 450bps on
lower revenues, especially license revenues.
n We believe that, the products business also witnessed a fall in margins on the
back continued spend on sales and marketing.
n We opine that, most of the benefits of cost control have already accrued and
would monitor the same closely in future quarters.
n However, higher revenues may lead to an improvement in margins over
2QFY10 levels.
