Oracle Financial Services Software Ltd (5 Rs) A strong MNC software company cmp Rs 3350-3400 One year Target price Rs 4500

 

Oracle Financial Services Software Limited (OFSS)  majority owned by Oracle, is a world leader in providing IT solutions to the financial services industry. With its experience of delivering value-based IT solutions to global financial institutions. OFSS dedicated research and development centers excel in innovation by developing world class products that strive to be ahead of the market. OFSS offers financial institutions the world’s most comprehensive and contemporary banking applications and a technology footprint that addresses their complex IT and business requirements. It offers a comprehensive suite of offerings encompassing retail, corporate, and investment banking, funds, cash management, trade, treasury, payments, lending, asset management, compliance, enterprise risk and business analytics, anti-financial crime among others.

1. The products business (89%)(comprising product licensing, consulting and support) is principal business segment . Oracle FLEXCUBE is a complete banking solution for retail, corporate and investment banking, consumer lending, asset management, and investor servicing including payments. These solutions are built on latest technology and offer various deployment choices of a cloud / SaaS or an on-premise deployment.

2. Oracle Financial Services Prime Sourcing (8%)offers a comprehensive suite of consulting and application services addressing retail, corporate, and investment banking, funds, cash management, trade, treasury, payments, lending, private wealth management, asset management, compliance, enterprise risk and business analytics. PrimeSourcing offerings encompass end-to-end consulting partnership, providing comprehensive business and technology solutions that enable financial services enterprises to improve process efficiencies, optimize costs, meet risk and compliance requirements, define IT architecture, and manage the transformation process.

3. Oracle Business Process Outsourcing Services (BPO)(3%)  offers cost effective and high quality BPO services ranging from complex back-office work to contact center services for the banking, capital markets, insurance and asset management domains

Revenues comprise three streams –

1.  License fees :  standard licensing arrangements for products provide the bank a right to use the product up to a limit on number of users or sites or such other usage metric upon the payment of a license fee. The license fee is a function of a variety of quantitative and qualitative factors, including the number of copies, users, modules and geographical locations supported. The licenses are perpetual, non-exclusive, personal, non-transferable and royalty free. In products business, customers can optionally avail consulting services related to the implementation of products at their sites, integration with other systems or enhancements to address their specific requirements

2. Annual maintenance contract (post contract support – PCS) fees for the products : Annual maintenance contract (PCS) fees Customers typically sign an Annual Maintenance Contract with OFSS under which, it provides  technical support, maintenance, problem resolution and upgrades for the licensed products. These support agreements typically cover a period of twelve months and are renewed every year. The annual maintenance contracts generate steady revenues and could grow to the extent that new customers are entering a support agreement

3. Consulting fees in respective business segments: The customer is typically charged a service fee on either fixed price basis or a time and material basis based on the professional efforts incurred and associated out of pocket expenses. Both Prime Sourcing and BPO businesses comprise only of consulting services. The revenues generated from license fees and consulting services  depends on factors such as the number of new customers added, milestones achieved, implementation effort, etc. Therefore, such revenues typically vary from quarter to quarter and year to year.

 

Investment Rational

customers through digital channels, enhancing self-service, and reducing time to market for new products and services. Cloud technology is slowly moving to the forefront in the financial services industry as banks are beginning to see monetary benefits due to flexibility in business transformation. OFSS is well placed to help banks move to the cloud. It offers Software-as-a Service (SaaS) as also the option to host  applications in the customer data center along with the capability to manage it. They have adopted "build in" Machine Learning and AI into their applications as a principle. Today, Machine Learning algorithms can help  customers automatically generate the next best offers based on intelligent customer insight. Their AI and data science platform can help financial crime investigators reduce false positives. Conversational AI tools such as chatbots are now embedded in their digital experience platforms

Key Positives:

1.         1.. MNC Parentage

2.         2.Promoter’s share 73.12%r.

3.         3.Debt Free company

4.        4. ROCE >36%  ROE>26%

5.        5.Current Market cap 29483 crores (approx 6xof revenue)much lower than peers.

6.         6.A strong consistent slow growing  business model

7.         7.Q-3 Results already delivered EPS of Rs 163 (8% growth over last year)

8.       8.  Buy backs, Delisting etc. could be future triggers.

Ri   

Financial Performance:

 

 OFSS has delivered flat but consistent  Q3 results the EPS for nine months for FY21-22 is Rs 163.33 and full year expected EPS on conservative estimate could be close to  Rs215 .Stock is availaible at PE multiple of 15.5-15.8 which is very attractive for a MNC .A forward PE multiple of 20 with estimated EPS FY22-23 of Rs 230-232 stock has potential to touch Rs 4500 in one year. Company has been rewarding shareholder with very high dividend last year it was Rs 200 this year it could increase the dividend payout to Rs 210+ so if we consider dividend + potential appreciation of Rs 1100 it can deliver 40% returns in one year from CMP of Rs 3350-3400.