The banking, financial services and insurance (BFSI) segment continues to be the top contributor to revenues for offshore players. There are some large sized companies, especially those with proprietary product offerings that have been able to drive growth by concentrating on this high-margin segment.

Oracle Financial Services Software (Oracle Financial) is one such player that caters to the entire gamut of software requirements to top BFSI players across the world.

Investors with a two-year horizon can consider retaining the stock, which has reasonable business momentum, but is richly valued. Continuing traction in its high-margin products business, ramp up in top clients and favourable operational parameters such as healthy geographic and effort-mix are key positives for the company.

At Rs 2,521, Oracle Financial trades at 19 times its likely per share earnings for FY13. This is at a premium to most top-tier IT players. But given that the company's net profit margins (above 28 per cent) are among the highest in the industry, it tends to enjoy the valuations of top-tier IT players such as Infosys and TCS. Since the stock has gone into a premium compared to top software players, investors need to wait out for a couple of years for any significant upside from these levels.

The cash per share, at Rs 469 which is 19 per cent of the stock's price, provides further cushion our recommendation. In FY12, the company's revenues grew by 5 per cent to Rs 3146.7 crore, while net profits fell 18 percent to Rs 909.3 crore. The fall in profits has been due to a more than three-fold increase in tax outflows as incentives relating to STPIs came to a close.

Products lead growth

Oracle Financial's FLEXCUBE, a banking product, is among the highest revenue earners in the industry. This software product is ahead of similar offerings of peers such as Infosys' Finacle and TCS' BaNCS in market share.

The company derives 73 per cent of its overall revenues from its products business. This high proportion gives it superior margins.

In FY12, revenues from this segment grew by a healthy 14 per cent, which suggests that the company has been able to tap into discretionary spends of clients. With higher product sales, licence fee, services and implementation revenues would follow, which increases revenue visibility for the company.

Clients ramp up

The company is so focussed on margins that even in its services business (25 per cent of revenues), it consciously takes on only those projects that would be lucrative. This segment fell in FY12 as a result. Overall, the mix of offerings for Oracle Financial makes it quite resilient, while also driving overall margins.

The company has seen its top clients growing at a faster pace than the company's, and have enhanced their contribution to revenues. While its top customer has seen contribution to revenues go up from 9 per cent to 11 per cent in FY12, the top 10 clients too have seen improvement.

This indicates that Oracle Financial has been able to mine its customers reasonably well.

The company also has a healthy geographic-mix. North America (34 per cent of revenues), Europe (20 per cent), Asia-Pacific (30 per cent) and the MEA region (14 per cent) are the key regions for the company.

The company has derived strong growth from fast growing areas such as Asia Pacific, while North America continues to hold steady potential. Demand has been witnessed in both products and services, making for a healthy blend.

Oracle has also steadily increased its offshore component of revenues over the past few quarters. In FY12, despite being focussed on products — that requires significant onsite presence — the company has managed to derive 53 per cent of revenues from offshore. This optimises costs significantly.

Risks

Attrition for the company, though on a declining trend, is still at 21 per cent. This is among the highest in the industry and is a key execution risk. Pricing pressure on products is another key risk as Infosys and TCS up the ante on this front.

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