*Oracle Fin. Serv. SoftwareNothing to cheer hereQ1FY15 deal signings of $32m, the highest since Q4FY11, has raisedhopes amongst investors of OFSS having turned a corner. Ouranalysis though suggests otherwise. Even in a best case scenario,new license signings of $80m in FY15 would only lead to 15% growthfor the products business. Given that we are moving into theseasonally weak quarters, the best case scenario is unlikely to playout in our view. With the special dividend surprise, investors arenow likely to keep a tab on cash accretion (to anticipate futurespecial dividends), making OFSS an event driven play. Currentlytrading at 22x FY16 EPS, OFSS is an expensive way to play theglobal products space. We raise our FY15 revenue and EPSestimates by 7% and 4% and reiterate SELL on OFSS with a new FVof Rs2,750 (up from Rs2,600).Nothing has changed fundamentally to alter our view*
OFSS has underperformed the BSE-IT index by c.1% YTD including special dividend. While Q1FY15 license signing of $32m was strong and the highest since Q4FY11, can we extrapolate these numbers to conclude higher growth is in the offing in FY15 and FY16? We don’t think so. *Deal closures comforting but quality of deals a concern*: While the street is bullish on the $32m new license signings in Q1FY15, we are not enthused with the quality of deals signed. Given operating leverage can be a double edged sword we acknowledge deal signings were required to defend margins. OFSS has struggled for growth since the start of FY12 and were it not for a 25% currency depreciation since then, OFSS’ product gross margins could have declined to c.50% in FY14 from 65% in FY11. *Market continues to shrink*: The core banking market has been declining since 2008, with the number of deals reducing from 439 in CY08 to 220 in CY13. OFSS will find it tough to drive growth in a declining market. Bullish investors’ thesis of a replacement market for core banking software is yet to play out over the last 10 years as banks resist change and demand for middle ware continues. *Investors will keep tab on cash accretion to anticipate future special* *dividend*: Whilst the rationale for declaring the special dividend is not clear to us given the taxation issues surrounding the same, the event is now behind us. Given annual free cash generation of $190-220m, investors would keep tab on the cash accretion to anticipate future special dividends, making the stock an event driven play. *Delisting argument has been around since 2006*: While it makes little sense for the parent Oracle Corp to keep OFSS listed, we doubt if Oracle would go all the way now given OFSS is in a mature to declining growth trajectory; currency depreciation doesn’t help the total outflow either. *Valuation* We are 12% and 19% lower than consensus on PAT for FY15 and FY16 as other income gets lowered driven by payment of dividend. Additionally, forex gain of Rs1.45bn in FY14 is unlikely to recur in FY15, with the Rs84m forex loss incurred in Q1FY15 likely to remain in the same bracket if USDINR remains in the 60-61 range. OFSS looks to us to be very expensive given its growth expectations. Reiterate SELL. -- -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no guarantee for the genuineness of the same."ANY member of this forum doesnt prepare or publish any research report; or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or iv. give price target; --- You received this message because you are subscribed to the Google Groups "Niftyviews.com" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/d/optout.
