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Oracle Fin. Ser.: Products make a come back - Views on News from Equitymaster

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Oracle Fin. Ser.: Products make a come back
Feb 3, 2010

Performance summary
  • Oracle Financial Services’ topline grows by 7% QoQ during 3QFY10, remains flat for 9mFY10.
  • Growth during the quarter driven by the surge in product business revenues.
  • Operating margins expand by 10% QoQ during 3QFY10 on the back of effective all-round cost containment and decrease in headcount.
  • Net profits grow by 10% QoQ during 3QFY10 on back of better operating performance, and reduced depreciation. However, forex volatility has affected bottomline resulting in a negative other income component. Excluding this (negative other income), net profits grow by 51% QoQ during the quarter.
  • Employee count stands at 10,396 at the end of 3QFY10, lower by 186 as compared to 2QFY10.
  • Adds 22 new customers – 16 for IT products and 6 for IT services businesses.


Consolidated financial performance snapshot
(Rs m) 2QFY10 3QFY10 Change 9mFY09 9mFY10 Change
Sales 6,790 7,272 7.1% 21,327 21,162 -0.8%
Expenditure 4,796 4,408 -8.1% 16,713 13,948 -16.5%
Operating Profit 1,994 2,864 43.6% 4,614 7,214 56.3%
Operating Profit margin (%) 29.4% 39.4%   21.6% 34.1%  
Other income and Interest expense 349 (294)   1,348 (149) -111.1%
Depreciation 131 117 -10.7% 421 374 -11.1%
Profit before tax 2,212 2,453 10.9% 5,541 6,690 20.7%
Exceptional Items - -   (469) -  
Profit before tax 2,212 2,453 10.9% 5,072 6,690  
Tax 167 180 8.0% 422 512 21.2%
Share of profit in associate - -   12 - -100.0%
Minority Interest - -   13 2 -85.5%
Profit after tax/(loss) 2,046 2,273 11.1% 4,625 6,176 33.5%
Net profit margin (%) 30.1% 31.3%   21.7% 29.2%  
No. of shares (m)       83.9 83.8  
Diluted earnings per share (Rs)*         106.4  
P/E ratio (x)*         19.9  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Oracle Financial Services (OFS) recorded a topline growth of 7% QoQ during 3QFY10, which was mainly due to decent performance of its products and services segments. OFS’ IT products business (about 65% of the consolidated revenues) grew by 10% QoQ during 3QFY10. This business registered a robust growth as license revenues almost tripled. Though the professional services for its products business showed muted performance, annual maintenance revenues remained strong. The company’s IT services business (accounts for 32% of sales) also grew by 4% sequentially. The KPO (Knowledge Process Outsourcing) segment registered a decline of 16% QoQ during the quarter.

  • OFS managed to maintain its dominance in its key markets with geographical mix of revenue remaining same as in 2QFY10. It registered a uniform growth of 7% across all geographies like North America, Europe and Middle East which contributed 34%, 30% and 20% respectively to company’s topline during 3QFY10.

    Revenue Breakup
    (Rs m) 2QFY10 3QFY10 Change
    Segment wise      
    Products 4,278 4,709 10.1%
    Services 2,268 2,360 4.1%
    KPO 244 204 -16.3%
    Geography-wise      
    North America 2,309 2,472 7.1%
    Middle East & Africa 951 1,018 7.1%
    Asia -Pacific 1,358 1,454 7.1%
    Europe 2,037 2,182 7.1%
    Latin America and Caribbean 136 145 7.1%

    (Rs m) 2QFY10 3QFY10 Change
    Product revenue breakup      
    License Fees 342 1,130 230.2%
    Professional Services 2,909 2,449 -15.8%
    Annual Maintenance Charges 1,027 1,130 10.1%
    Total 4,278 4,709  

  • The operating margins of OFS expanded by a whopping 10% QoQ during 3QFY10, largely due to topline growth and decrease in sales and marketing and general costs. Margins improved by 13% YoY for 9MFY10 on back of 17% YoY decrease in expenses for the first half.

  • OFS’ net profits grew by 11% QoQ during 3QFY10. This growth was driven by growth in topline coupled with an excellent operating performance. For 9mFY10, margin improvement and decrease in depreciation charge boosted bottomline by 34% YoY.

What to expect?
At the current price of Rs 2,273, the stock is trading at a multiple of 18.6 times our estimated FY12 earnings. At these levels, we believe the stock is overpriced. We will update this analysis post an interaction with the management.

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