Buy Oracle Financial; target Rs 3360: Dolat Capital

Dolat Capital is bullish on Oracle Financial Services Software (OFSS) and has recommended buy rating on the stock with a target price of Rs 3360 in its August 10, 2012 research report.

“Oracle Financial Services Software (OFSS) has confirmed its major win with Wells Fargo for global rollout comprising its commercial and corporate banking. The management has indicated it to be an international rollout signaling a possible miss of US operations in the implementation. This win (if without US) in our opinion is definitely important in terms of business opportunity but lacks the criticality of getting an account in underpenetrated US market (till date only 2 banks in US – Union Bank and BBVA Compass - have implemented integrated 3rd party CBS).

OFSS continue to remain positive on the pipeline they hold and competitive positioning in the segment and expects sustained deal momentum in near term amidst global uncertainty. We believe company specific challenges would continue to trouble peers (Temenos - management change issues; Misys – initial management cashed out to PE investors) ensuring favourable positioning of OFSS.

Revenue from services grew 27% QoQ to ` 2.1bn which management believes has no one offs in it and reiterates its stability sustenance in the business segment going forward on annualized basis. We believe typical lumpiness in its services business would lead to some hits and misses but net addition of employees in the quarter (after a gap of 8 quarters) indicates some ramp ups in near term.

OFSS continue to remain confident on high earning quality across its revenue streams as it gets incrementally aligned to its parent’s practices. It continue to restrict itself for high margin business in services segment (EBIT Margin of over 27%) and is signing all new AMCs at 22% (inline with Oracle; portfolio rate at about 19%). We expect further gains in OPM of about 400bps in FY13/14 in view of product revenue share reaching 76% contribution to revenues (versus 66%/72% in FY11/12).

OFSS reported one of its best quarterly numbers post global financial crisis with a strong licence sales revenues of USD 19mn with 27 customer additions in the product division; suggesting strong traction. We have build in Licence revenues of USD 101mn/ 119mn for FY13/14E which in our opinion is conservative in view of recent wins and strong opportunities across markets (specifically China and LATAM). We have revised our FY14E estimates upward by 12%/21% in view of sustained license sale expectancy in the near to medium term. We maintain our BUY and sector Outperformer rating on the stock with a target price of ` 3360 valued at 18x of its FY14E earnings (inline with 5 yr average historical PE multiple),” says Dolat Capital research report.

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