Oracle Financial Services Software: Buy

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.

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