Accumulate Oracle Financial Services; target of Rs 3900: Dolat Capital
Dolat Capital’s research report on Oracle Financial Services
OFSS reported revenue growth of 11.7% YoY to ` 11.9bn (DCMe: ` 11bn), above our estimate led by surge in product revenue, primarily on the back of better new license revenue. EBIT margin improved 760bps YoY to 41.9% (DCMe: 36%) largely on the back of better gross margin led by double digit growth in new license fee. PAT grew 17.1% YoY to ` 40bn (DCMe: ` 35bn) supported by operational efficiencies despite higher tax rates (32.5%). Revenue from product segment increased 15.7% YoY to ` 10.4bn helped by implementation revenue (cont. 52% of Product revenue), which grew 6% YoY. Revenue from license fee grew 92.8% YoY led by new license deals signed of USD 19mn signed during the quarter; revenue from AMC improved by 4.8% YoY to ` 3,008mn (DCMe: ` 3,047mn). Revenue from service segment decreased 9.9% YoY to ` 1.2bn; EBIT margin declined 330bps YoY to 9.3%. Revenue from KPO declined 9.3% YoY to ` 293mn with better EBIT margin of 43.8%. Headcount in product segment decreased to 6,685 (6,231 earlier). There were two OBP deals in pipeline before this quarter, of which one large deals was closed in Q2FY18 which led robust growth in new license revenue (+92.8% YoY). The management expects the second deal (smaller in size) closure in H2FY18 which will have a positive impact on license revenue growth. We believe new license revenue will continue to report strong double-digit growth (24% YoY) in FY18 supported by the OBP deals signed; however, growth in implementation revenue is expected to be muted (8% YoY) in FY18. EBIT margin in the product segment may improve in the near term primarily led by higher growth in new license; however, higher investments remain to be a headwind for margin going ahead.
We believe, OFSS may outperform vs large cap IT peers given its better earnings growth prospects (CAGR of 9% – FY18-20); however, concerns remain regarding sustainability of new license revenue growth in the medium term as growth in the former is usually lumpy in nature. The stock is currently trading at fair valuations of 19.4x/17.3x based on FY19/FY20. We marginally revise our estimates (1.5%-3%) factoring better revenue growth; maintain our ACCUMULATE rating and rollover to Sep’18 TP of ` 3,900 (` 3,800 earlier) based on 19.5x one yr fwd. PER.
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