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Oracle Fin. Ser.: Product segment leads the way - Views on News from Equitymaster
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Oracle Fin. Ser.: Product segment leads the way
Nov 11, 2008

Performance summary
  • Oracle Financial Services’ (erstwhile i-flex) topline grows by 12% QoQ during 2QFY09 and 23% YoY during 1HFY09. Growth mainly aided by the product segment.
  • Operating margins improved by 6% QoQ in 2QFY09.
  • Bottomline, excluding an extraordinary expense, grows by 33% QoQ during 2QFY09 aided by expansion in operating margins and a sharp rise in other income.
  • Adds 16 new customers and 743 employees during the quarter. Attrition rate declines to 17%, from 20% in 1QFY09.


Consolidated financial performance snapshot
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 6,318 7,074 12.0% 10,891 13,392 23.0%
Expenditure 5,629 5,878 4.4% 9,244 11,507 24.5%
Operating Profit 689 1,196 73.5% 1,648 1,885 14.4%
Operating Profit margin (%) 10.9% 16.9% 15.1% 14.1%
Other income 639 441 -30.9% 124 1,079
Depreciation 138 138 0.1% 359 276 -23.2%
Profit before tax 1,190 1,499 26.0% 1,413 2,688 90.3%
Tax 128 91 -28.9% 173 219 26.8%
Share of profit in associate (6) (2) 1 (8)
Minority Interest (1) (3) - (2)
Profit after tax/(loss) 1,055 1,403 33.0% 1,240 2,471 99.4%
Extraordinary income/(expense) - (469) - (469)
Net profit including extraordinary item 1,055 934 -11.5% 1,240 2,002 61.5%
Net profit margin (%) 16.7% 19.8% 11.4% 18.5%
No. of shares (m) 83.9 83.9
Diluted earnings per share (Rs)*# 64.2
P/E ratio (x)*# 9.6
* Trailing Twelve Months (TTM)
# Excluding extraordinary item

What has driven performance in 2QFY09?
  • Oracle Financial Services (OFS) recorded a topline growth of 12% QoQ during 2QFY09, 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 the products business was led by 41% QoQ increase in annual maintenance charges (which formed 22% of product revenues). As for the services business, sales declined by 2% QoQ during the quarter. The KPO (Knowledge Process Outsourcing) segment registered a decent growth of 27% QoQ although it contributed to only 3% of total revenues.

    Segmental Analysis table
    (Rs m) 1QFY09 2QFY09 Change
    Products      
    Revenue 3,634 4,434 22.0%
    Cost of revenue 1,788 2,006 12.2%
    Selling and marketing expense 826 585 -29.3%
    General and administration expense 283 306 8.1%
    Total cost 2,897 2,896 0.0%
    Operating profit 736 1,538 108.8%
    Operating margins 20.3% 34.7%  
    Services      
    Revenue 2,544 2,491 -2.1%
    Operating margins 14.4% 4.6%  
    KPO      
    Revenue 141 178 26.6%
    Operating margins -8.2% 28.7%  

  • OFS ramped up its business in the EMEA (Europe, Middle-East and Africa) and Asia-Pacific regions. The company’s revenue from Asia-Pacific and Middle East grew by 29% QoQ and 17% QoQ respectively during 2QFY09.

  • The operating margins of OFS expanded by 6% QoQ during 2QFY09, largely due to decrease in cost as percentage of total revenue. The cost of revenue as percentage of revenue fell down to 56% as against 58% in the previous quarter. Sales, general and administrative costs also came down, to 27% from 31% in 1QFY09 (as percentage of revenue).

  • OFS’ net profits grew by 33% QoQ during 2QFY09. The expansion was largely driven by expansion in operating margins and increase in other income, which grew on account of higher interest income. However, including a one time extraordinary expense (provisioning towards settlement of a dispute), net profits declined by 12% QoQ during the quarter.

What to expect?
At the current price of Rs 614, the stock is trading at a multiple of 8.6 times our estimated FY11 earnings. OFS’ first half performance has been fairly in line with our estimates, excluding the impact from the one-off extraordinary expense, which we shall now have to factor into our numbers. Overall, we maintain a cautious view on the company given the decreased levels of disclosures after its acquisition by Oracle.

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