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Oracle Financial Services Equity Research

HomeCompanyOracle Financial Services Equity Research

Date of Research – 20 January 2016

Price – Rs. 3536.10

About the Company

Incorporated on September 27, 1989, Oracle Financial Services Software Limited (“Oracle Financial” or the “Company“), together with its subsidiaries, provides information technology (IT) solutions and knowledge processing services to the financial services industry worldwide. The Company was formerly known as i-flex Solutions Ltd. and changed to its current name in August 2008.

The Company operates in three segments: (a) Product licenses and related activities, (b) IT solutions and consulting services, and (c) Business Processing Outsourcing (BPO) services. Product licenses and related activities segment deals with various banking software products like Oracle FLEXCUBE, a banking product suite for consumer, corporate, private wealth management, mobile and Internet banking, asset management, and investor servicing.

IT solutions and consulting services segment offers services spanning the entire lifecycle of applications used by financial service institutions. The Company has a strong global presence in 27 overseas locations operating across four subsidiaries (i-flex solutions Inc. in the USA, i-flex solutions b.v. in the Netherlands, i-flex solutions pte. ltd. in Singapore and iPSL in India). The Company also has strong alliance with IT companies such as Hewlett-Packard, IBM, Sun Microsystems and Intel.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 3,474.00 3,741.32 3,904.91 4,092.80  4,426.53 
Expenses 2,254.84 2,341.94 2,354.11 2,412.11  2,692.64  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 1,219.16 1,399.38 1,550.80 1,680.69  1,733.89  
Depreciation 65.50 71.67 68.09 52.92  70.19  
Other income 459.54 673.65 348.13 255.97  156.37  
Exceptional Items 21.93 62.83  
PBT 1,613.20 2,001.36 1,830.84 1,861.81  1,757.24  
Tax 538.06 642.04 638.52 696.03  571.59  
PAT (before Minority Interest and share of Associates) 1,075.14 1,359.32 1,192.32 1,165.78  1,185.65  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 35.09 37.40 39.71 41.06  39.17 
Net Profit Margin Ratio 30.95 36.33 30.53 28.48 

26.79 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 41.99 42.03 42.07 42.31 42.43 
Share application money pending allotment 0.12 0.36 0.06 0.30 
Reserves & Surplus 6,275.38 7,364.40 8,734.48 3,401.76 3,632.68 
Net worth (shareholders funds) 6,317.37 7,406.44 8,776.91 3,444.13 3,675.41 
Minority Interest – 
Other liabilities and provisions 79.21 87.81 97.94 106.18 133.15 
Current liabilities 812.01 918.62 843.50 2,718.47 1,867.91 
Deferred Tax Liabilities 9.26 3.96 6.78 1.91 0.50 
Total Liabilities 7,217.97 8,416.82 9,725.13 6,270.70 5,676.96 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,035.80 1,007.77 966.03 911.44 878.63 
Noncurrent Investments – 
Current assets 5,614.87 6,724.96 8,158.96 4,672.09 4,088.54 
Long term advances and other noncurrent assets 496.57 612.92 513.45 586.57 600.15 
Deferred Tax Assets 70.73 71.18 86.70 100.61 109.65 
Total assets 6,129.32 8,416.82 9,725.13 6,270.70 5,676.96 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 14.39 16.46 15.94 45.03 45.73 
ROE / RONW 17.60 14.52 15.49 34.62 31.72 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 3,474.00 3,741.32 3,904.91 4,092.80 4,426.53 
Growth (%) 10.40 % 7.69 % 4.37 % 4.81 % 8.15 %
PAT (Rs. Cr.) 1,075.14 1,359.32 1,192.32 1,165.78 1,185.65  
Growth (%) 18.24 % 26.43 % (12.29 %) (2.23 %) 1.70 %
Earnings Per Share – Basic (Rs. ) 127.98 161.64 141.30 137.58 139.76
Earning Per Share – Diluted (Rs. ) 127.40 160.96 140.71 136.84 139.29
Price to Earnings 19.96 17.43 24.80 25.78 25.59

Dividend History

The Company has maintained an average dividend yield of 0.00 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Oracle Financial’s average current ratio over the last 5 financial years has been 6.51 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Oracle Financial’s average long term debt to equity ratio over the last 4 financial years has been 0.00 which indicate that the Company is operating with a zero level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Oracle Financial’s average interest coverage ratio over the last 4 financial years cannot be calculated as the company does not have any interest obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Oracle Financial reported a promoter holding of 74.09 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 14.51 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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