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Oracle Fin. Ser.: Flexing its muscles - Views on News from Equitymaster
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Oracle Fin. Ser.: Flexing its muscles
Feb 6, 2009

Performance summary
  • Oracle Financial Services’ (erstwhile i-flex) topline grows by 13% QoQ during 3QFY09 and 25% YoY during 9mFY09. Growth mainly aided by the product segment.
  • Operating margins more than double during the quarter, mainly on account of cost containment and focus on productivity improvements.
  • Bottomline, excluding extraordinary expenses, grows by 88% QoQ during 3QFY09 aided by expansion in operating margins.
  • Company adds 11 new customers and 345 employees during the quarter. Attrition rate declines to 16%, from 17% in 2QFY09.


Consolidated financial performance snapshot
(Rs m) 2QFY09 3QFY09 Change 9mFY08 9mFY09 Change
Sales 7,074 8,012 13.3% 17,087 21,327 24.8%
Expenditure 5,878 5,283 -10.1% 14,111 16,713 18.4%
Operating Profit 1,196 2,729 128.2% 2,976 4,614 55.0%
Operating Profit margin (%) 16.9% 34.1%   17.4% 21.6%  
Other income 441 270 -38.9% 184 1,348 631.4%
Depreciation 138 145 5.4% 550 421 -23.5%
Profit before tax 1,499 2,853 90.3% 2,610 5,542 112.3%
Tax 91 203 123.5% 301 422 40.4%
Share of profit in associate (2) 4   2 12  
Minority Interest (3) 10   - 13  
Profit after tax/(loss) 1,403 2,636 87.8% 2,307 5,094 120.8%
Extraordinary income/(expense) (469) -   - (469)  
Net profit including extraordinary item 934 2,636 182.2% 2,307 4,625 100.5%
Net profit margin (%) 19.8% 32.9%   13.5% 23.9%  
No. of shares (m)       83.9 83.9  
Diluted earnings per share (Rs)*#         82.8  
P/E ratio (x)*#         6.8  
# Excluding extraordinary item

What has driven performance in 3QFY09?
  • Oracle Financial Services (OFS) recorded sales growth of 13% QoQ during 3QFY09, which was mainly on account of strong performance of the products division. The product business that contributed almost 60% of the consolidated revenues grew by 22% QoQ during the quarter. Growth for this business was led by 22% QoQ increase in implementation fees (which formed 62% of product revenues). As for the services business, sales increased by 18% QoQ during the quarter. The KPO (Knowledge Process Outsourcing) segment registered growth of 6% QoQ.

    Segmental Analysis
    (Rs m) 2QFY09 3QFY09 Change
    Products 4,434 4,880 22.0%
    % share 63% 61%  
    Services 2,491 2,945 18.2%
    % share 35% 37%  
    KPO 178 188 5.6%
    % share 2.5% 2.3%  

  • OFS significantly ramped up its business in the Middle-East and Africa and Asia-Pacific regions. The company’s revenue from Asia-Pacific and Middle East grew by 29% QoQ and 30% QoQ respectively during the quarter.

  • OFS’ operating margins expanded by 17% QoQ during 3QFY09, largely due to decrease in costs as percentage of total revenue. The cost of revenue as percentage of revenue fell down to 44% as against 56% in the previous quarter. Sales, general and administrative costs also came down, to 22% from 27% in 2QFY09 (as percentage of revenue). The management has indicated that improvement in operating can also be attributed to the fact that the company has booked cost in earlier quarters and now booked revenues in this quarter.

  • OFS’ net profits grew by 88% QoQ during 3QFY09. The expansion was largely driven by expansion in operating margins. However, including a onetime extraordinary expense (provisioning towards settlement of a dispute during 2QFY09), net profits increased by 182% QoQ during 3QFY09.

What to expect?
At the current price of Rs 563, the stock is trading at a multiple of 8.8 times our estimated FY11 earnings. The company has delivered strong performance this quarter mainly on account of operational efficiencies and cost containment measures. It has been able to cross-sell its financial services to product customer base which has resulted into few significant win in the service business. OFS inked 11 deals this quarter which gives good revenue visibility going forward. The management has indicated that it is cautious about current scenario and is taking appropriate measure to deal with the situation. The management has also indicated that it is witnessing pricing pressure and expects it to continue going forward.

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