Oracle Financial Services: Rich valuations, weak outlook

The IT products company trades at a huge premium to its larger peers as well as the Sensex, despite continued weakness in its core business

Oracle Financial Services (OFS) scrip has fallen over 3% since 7th May to Rs 2,620 following poor set of results. US-Based IT company Oracle which owns 80.3% stake in OFS will sell about 5.3% stake via an offer for sale in to bring down its shareholding to 75%. The stake is worth about Rs 1,000 crore at Wednesday's closing share price. Analysts remain bearish on the company given its high dependence on slowing down discretionary IT spending segment.

"The OFS stock is trading at 20 times FY14 estimated earnings, the upper end of its Price/Earnings band. This is at a 20% premium to large-cap IT services peers and already prices in strategic premium. We value OFS at 15 times fwd P/E to arrive at our March’14 target price of Rs 2,200", says Rumit Dugar, IT analyst at Religare Capital Markets.

He expects the company to grow its revenues and earnings per share by 7% and 6% respectively over FY13-FY15 and has a Sell rating on the stock.

Given the weakening macro in its key market- Europe, the company will have to rely on lower-margin regions such Asia Pacific and Middle East and Africa to drive new license sales.

Q4: weak scorecard

OFS reported dismal set of numbers for the quarter ended 31st March, 2013. Revenues grew by 3.4% sequentially to Rs 881 crore - driven by product revenues (77% of overall revenues) which grew by 9% on a sequential basis. However, sequential fall of 13% in its services business (20% of overall revenues) restricted top-line growth for the company.

When compared to the March 2012 quarter, product revenues were flattish, up just 1%. Despite a weak top-line, net profit grew by 4.9% sequentially to Rs 281 crore largely driven by a weaker rupee and higher other income.

Going forward, the company's prospects will hinge upon pick up in the BFSI discretionary spending segment given OFS' high dependence on this segment. A slower/delayed recovery could hit the company's products business going forward.