Key Data INR CMP 2289 Target Price 2379 Bloomberg Code OFSS IN Reuters Code ORCL.BO BSE Code 532466 NSE Code OFSS Face Value (INR) 5 Market Cap (INR bn) 192.3 52 Week High (INR) 2,525 52 Week Low (INR) 1,995 Avg. Daily Volume (6m) 123,274 Shareholding % Promoters Group 80.4 Banks / Mutual Fund / FI 4.8 FII 2.2 Others 12.6 Total 100 Oracle Financial Services Software Ltd Oracle Financial Services Software Ltd s (OFSS) product division s revenue growth continues to lag domestic peer set (such as Infosys and TCS) on YoY basis in 2Q FY11 primarily due to competitive pressure in US and Europe (constituting 43% of product segment s revenue in 2Q FY11). IT services business declined by 4.6% QoQ led by significant slump in revenue from top 10 clients. Overall operating margin of the company improved by 580 bps QoQ because of the increase in share of product business (being higher margin business) in overall revenue in 2Q FY11. Taking into account, increasing competition from domestic peers (i.e. Infosys and TCS) in product space in developed markets and slowdown in IT services business inspite of improvement in demand environment for other offshore players; we are maintaining our HOLD recommendation on the stock. Highlights Growth led by products: OFSS s consolidated revenue in 2Q FY11 increased 14.3% to INR7.4 billion from INR6.5 billion in 1Q FY11, led by growth in products segment. However, IT services business continues to witness a slowdown. Revenue breakup In INR mn 6,000 4,000 2,000-5,028 3,988 26% 2,404-5% 2,293 5% 173 182 Products IT services BPO 3 2 1-1 QoQ % chg 1Q FY11 2Q FY11 % Chg Emerging markets led growth in product business; developed markets continue to be a concern area: Product segment s revenue growth in 2Q FY11 was led by strong up-tick in business from emerging markets (constituting 57% of total product revenue) after registering decline of 33% QoQ in 1Q FY11. Product segment revenue growth in 2QFY11-geography wise Analyst Hardik Shah research@acm.co.in Tel: +91-22 2858 3409 10 5-5 5.2% -0.7% 75.3% 59.5% -17.6% -21.6% US Europe Emerging market QoQ YoY 1
However, developed markets (i.e. US and Europe) continued to witness pressure for the second consecutive quarter, which is adversely impacting performance compared to its domestic peers (such as Infosys and TCS) on YoY basis despite significant growth in this quarter on QoQ basis. Product business revenue growth in 2QFY11 4 2 26% 4% 18% 27% 33% QoQ YoY OFSSL Infosy s TCS IT Services segment s revenue declined despite improvement in demand for offshoring: IT services segment s revenue declined by 4.6% QoQ (in INR) primarily led by significant decline in revenue from top 10 clients in 2Q FY11 on QoQ basis. As % of sales 35% 3 25% 2 15% 1 5% Revenue from top 10 clients- IT services segment 33. 19. 20. 15. 12. 9. Top client Top 2-5 client Top 6-10 client 1Q FY11 2Q FY11 Increase in share of product segment s in total revenue and its margin led overall margin improvement: Operating margins improved by 580 bps (QoQ) to 36.2% in 2Q FY11, led by increase in product segment s (having relatively higher margin compared to other segments) share in the overall revenues by 6.3% QoQ to 67% in 2Q FY11. Further, the margins of product business increased by 7.7% QoQ to 48% in 2Q FY11 because of the increase in share of license fee in overall product segment s revenue. Whereas, IT Services margin declined led by volume de-growth and increase in onsite mix in total revenue (having relatively lower margin than offshore component). 2
OPM % 6 4 2 Operating margin 8% 48% 41% 3 31% 24% 3% 34% -6% Software product IT services BPO 1Q FY11 2Q FY11 % Chg 1 5% -5% -1 QoQ % chg Outlook and valuation: Taking into account, increasing competition from domestic peers (i.e. Infosys and TCS) in product space in developed markets and slowdown in IT services business inspite of improvement in demand environment for other offshore players; we are maintaining our HOLD recommendation on the stock. Considering, cash per share of INR302 and core business value of INR2077/share, we arrive at price target to INR2379. Business segments EPS in FY12E Forward P/E Segment value per share Cash per share - - 302 Software product EPS 107.9 18.0 1,943 IT services EPS 13.4 10.0 134 Target Price for OFSSL 2,379 Source- ACMIIL Research 3
Earning summary Particulars 2Q FY11 1Q FY11 QoQ % Chg 2Q FY10 YoY % Chg Revenue 7,436.0 6,503.5 14.3% 6,790.1 9.5% Cost of revenue 3,367.0 3,215.8 4.7% 3,402.3-1. Selling & marketing expenses 646.5 602.1 7.4% 674.4-4.1% General & administrative expenses 731.5 709.1 3.2% 719.5 1.7% Operating profit 2,691.0 1,976.5 36.1% 1,993.9 35. Depreciation and amortization 91.0 110.9-18. 130.6-30.3% Interest income 298.5 211.8 40.9% 185.2 61.2% Other income (expenses) 37.8 77.3-51.1% 163.8 - Exceptional item - - - - Profit Before Tax 2,936.4 2,154.7 36.3% 2,212.4 32.7% Tax 301.2 221.2 36.2% 166.8 80.5% Profit before minority Interest 2,635.2 1,933.5 36.3% 2,045.6 28.8% Net Profit 2,635.2 1,933.5 36.3% 2,045.6 28.8% Source: Company. Profit and loss statement Revenue 29,276.2 28,739.7 29,417.9 35,704.1 Cost of revenue 14,491.6 13,086.9 13,454.9 16,592.6 Gross profit 14,784.6 15,652.9 15,963.0 19,111.4 Selling & marketing expenses 3,426.3 2,353.7 2,542.1 2,942.4 General & administrative expenses 3,603.4 3,018.2 2,978.2 3,345.5 Operating profit 7,754.8 10,281.0 10,442.8 12,823.5 Depreciation and amortization 557.9 488.7 401.1 463.7 Impairment loss 291.1 Interest income 770.6 699.6 590.9 725.6 Foreign exchange (loss)/gain 1,044.1 (1,568.7) Other income (expenses), net (25.2) 12.9 Exceptional loss 468.9 Profit Before Tax 8,226.3 8,936.2 10,632.6 13,085.4 Tax 835.4 1,197.7 1,488.6 2,355.4 Profit before minority Interest and exceptional item 7,390.9 7,738.5 9,144.0 10,730.0 Share of (loss) profit of associate company 12.6 Share of Minority interest 12.9 1.9 Net Profit 7,365.4 7,736.6 9,144.0 10,730.0 4
Balance sheet Share capital 418.8 419.3 419.3 419.3 Reserves and surplus 34,629.9 42,484.7 51,628.7 62,358.7 Net worth 35,048.7 42,904.0 52,048.0 62,778.0 Deferred tax liability 20.7 32.9 32.9 32.9 Minority interest 19.2 - - - Total Funds 35,088.7 42,936.9 52,080.9 62,810.9 Gross Block 12,052.8 12,013.6 16,421.6 21,188.6 Less: Accumulated depreciation 3,360.4 3,649.8 4,050.8 4,514.5 Net Block 8,692.4 8,363.8 12,370.7 16,674.1 Capital work-in-progress and advances 1,013.3 1,304.1 800.0 800.0 Investments 9.6 10.0 10.0 10.0 Deferred tax asset 325.9 399.7 399.7 399.7 Net current assets Total Assets 25,047.5 32,859.3 38,500.4 44,927.1 35,088.7 42,936.9 52,080.9 62,810.9 Cash flow statement Profit Before Tax 8,226.3 8,936.2 10,632.6 13,085.4 Operating profit before working capital changes 8,278.1 8,712.3 10,442.8 12,823.5 Net cash provided by operating activities 6,213.5 6,259.1 9,685.1 8,898.1 Net cash used in investing activities (4,783.7) 460.9 (3,313.0) (4,041.4) Net cash provided by (used in) financing activities (9.2) - - - Effect of exchange difference on translation 274.5 - - - Net increase (decrease) in cash and cash equivalents 1,695.2 6,720.1 6,372.1 4,856.7 Cash and cash equivalents at beginning of the year 3,217.0 4,912.2 11,632.2 18,004.3 Cash and cash equivalents at end of the year 4,912.2 11,632.2 18,004.3 22,861.0 5
Ratios Profitability Ratios Operating profit margin 26.5% 35.8% 35.5% 35.9% PAT Margin 25.2% 26.9% 31.1% 30.1% RONW 21. 18. 17.6% 17.1% ROCE 23.4% 20.8% 20.4% 20.8% Per Share Reported Earnings (INR) 87.9 92.3 109.0 128.0 Core Business Earnings (INR) 79.6 84.8 102.9 120.5 Growth Ratios Revenue 23. -1.8% 2.4% 21.4% Operating profit 66. 32.6% 1.6% 22.8% Net profit (Reported) 77.2% 5. 18.2% 17.3% 6
Notes Institutional Sales: Ravindra Nath, Tel: +91 22 2858 3400 Kirti Bagri, Tel: +91 22 2858 3731 Himanshu Varia, Tel: +91 22 2858 3732 Email: instsales@acm.co.in Institutional Dealing: Email: instdealing@acm.co.in Disclaimer: This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. SEBI Regn No: BSE INB 010607233 (Cash); INF 010607233 (F&O), NSE INB 230607239 (Cash); INF 230607239 (F&O) 7