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Oracle Fin. Services: Products lead the charge - Views on News from Equitymaster
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Oracle Fin. Services: Products lead the charge
Jun 24, 2009

Performance summary
  • Oracle Financial Services’ (erstwhile i-flex) reported a 23% YoY growth in sales during FY09. Growth mainly aided by the product segment which grew by 31% YoY. Sales decline by around 1% QoQ during 4QFY09.
  • Operating margins expand substantially during FY09 due to factors like change in accounting policy for revenue recognition, cost containment and focus on productivity improvements.
  • Bottomline before extraordinary items grows by 89% YoY during FY09 aided by expansion in operating margins and a substantial rise in the other income component.
  • Company adds 68 new customers during the year including 26 in 4QFY09. Attrition rate declines to 15%, from 19% in FY08.


Consolidated financial performance snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 8,012 7,949 -0.8% 23,802 29,276 23.0%
Expenditure 5,283 4,808 -9.0% 19,130 21,521 12.5%
Operating Profit 2,729 3,141 15.1% 4,672 7,755 66.0%
Operating Profit margin (%) 34.1% 39.5% 19.6% 26.5%
Other income 270 150 -44.4% 640 1,498 134.2%
Depreciation 145 137 -6.0% 706 558 -21.0%
Profit before tax 2,853 3,154 10.5% 4,606 8,695 88.8%
Tax 203 413 103.1% 442 835 89.1%
Share of profit in associate 4 0.4 4 13 205.1%
Minority Interest 10 0.2 4 13 192.1%
Profit after tax/(loss) 2,636 2,740 4.0% 4,156 7,834 88.5%
Extraordinary income/(expense) - - - (469)
Net profit including extraordinary item 2,636 2,740 4.0% 4,156 7,365 77.2%
Net profit margin (%) 32.9% 34.5% 17.5% 26.8%
No. of shares (m) 83.9 83.8
Diluted earnings per share (Rs)* 87.9
P/E ratio (x)* 14.3

What has driven performance in FY09?
  • Oracle Financial Services (OFS) recorded sales growth of 23% YoY during FY09, which was mainly on account of strong performance of the products division. The product business that contributed almost 62% of the consolidated revenues grew by impressive 31% YoY during the fiscal. Growth for this business was led by 28% YoY increase in implementation fees (which formed 59% of product revenues). The company also saw a strong 28% YoY growth in sales of new licenses for its products. As for the services business which contributed 36% to the revenue, sales increased by 11% YoY during FY09. The KPO (Knowledge Process Outsourcing) segment registered growth of 51% YoY, though it contributed less than 2% of the company’s revenue.

    Segmental Analysis
    Revenue break up
    (Rs m) FY08 FY09 Change
    Products 13,872 18,131 30.7%
    % share 58.3% 61.9%
    Services 9,371 10,426 11.3%
    % share 39.4% 35.6%
    KPO 475 719 51.2%
    % share 1.6% 3.0%

  • OFS significantly decreased its dependence on the North American market with its contribution coming to 29% as compared to 33% of sales last year. The company’s revenue from Asia-Pacific, Middle East and Europe grew by 42% YoY, 29% YoY and 23% YoY respectively during the fiscal. North American business increased at 8% YoY for the same period.

  • OFS’ operating margins expanded to 26.5% during FY09, largely due change in accounting policy for revenue recognition that resulted in some increase in sales and profit numbers. Better margins were also aided by decrease in costs as percentage of total revenue. The cost of revenue, which is largely made up of employee costs, declined from 55% of sales in FY08 to 50% in FY09. Better utilisation of manpower, a slight increase in share of offshore revenues and a substantial jump in fixed price contracts (where companies have the flexibility to cut costs thereby earning higher margins) also drove the profitability during FY09.

  • OFS’ net profits excluding extra ordinary items grew by 89% YoY during FY09. The expansion was largely driven by improvement in operating margins and higher other income. Net profit margins improved by around 7% as compared to last year. Including the extraordinary expense, profit growth stood at 77% YoY during the fiscal. A large part of the extraordinary loss was on account of impairment loss on goodwill arising out of the company’s acquisition of i-flex solutions Inc (Canada).

What to expect?
At the current price of Rs 1,260, the stock is trading at a multiple of 17.7 times our estimated FY11 earnings. While the company’s FY09 sales has been in line with our estimates, the profits are much higher given the substantial improvement in operating margins, which we had not projected. During FY09, OFS strengthened its customer base for Flexcube in Asia, Europe and EMEA by cross-selling its financial services to product customer base. The company acquired 56 new customers in FY09 along with inking more deals with existing clientele which gives good revenue visibility going forward. Despite downturn, profitability was registered in all businesses. We shall soon update our research report on the company, and subsequently our view on the stock.

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