Oracle Financial Services

A lot has already been discussed. IT basket is not right comparison. It can be only compared to only Temenos. IT services is lower margin biz which runs from high end work to low end BPO/Testing/Documentation.

But not very impressive set of numbers.

Travel restrictions seems to be hurting OFSS as they have majority of revenue coming from developing world, which is still not comfortable doing deals completely online.

Not sure if currency depreciation across these markets have pulled number downs.

I am keeping faith. OFSS is half valuation of IT services/Temenos and their product matches Temenos
Oracle vs Temenos: Gartner Peer Insights 2022

Slow growth is last thing which bothers me. I don’t find any other red flag. There is no opportunity cost from my PF perspective as I don’t see anything growing faster which is of same valuation & quality, so that I can switch. Third rung IT services which are having best 2 years of life are trading @ 25+ PE.

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I don’t want to name. Just that I am not comfortable with them. Many companies which I didn’t like have been multi-baggers.

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Decent quarterly results. Revenue up 5% YoY.

Tepid results as usual.

  1. 5 % rev growth in Q4, and for the full year.
  2. Net income also up 5% for Q4 and 7 % for the full year. At least margins holding up better than peers. Would be interesting to see attrition numbers if they disclose anywhere.
  3. Rs 190 Dividend.
  4. Signed the first SaaS deal with a Tier-1 US bank- is this a good sign for future growth ?

Disc: Holding, but disappointed to see the low revenue growth trajectory, when the product has so much potential. Intellect has executed much better in the same space (though on a lower base).

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OFSS seems to operate like a department of the parent, a tiny speck on the giant Oracle Corporation’s world map. Dividend supports the share price, while the parent can derive additional value by cross selling other products like Servers / Cloud, ERP, CRM etc. to the its banking customers. Most of the long-term investors may just be waiting for a corporate action, so they can book their capital gains and exit. One doesn’t know if such a day will come at all, but until then there is considerable opportunity cost in holding such stocks.

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Can you pls elaborate what kind of corporate action you referring to? Thanks

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There are long standing rumors that Oracle will take OFSS private by buying out the minority shareholders.

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I agree this could be a possibility. However, in event this happens, the share price may run up too much for Oracle’s comfort levels and they are in no desperate needs to go through this at any costs…so maybe they would let it as it is? Thoughts welcome!

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I agree. There is always a possibility. Oracle is cash-rich and has been buying back its own shares. The delisting in India involves reverse book building. The indicative floor price Oracle got from investment bankers last time exceeded what they were prepared to pay for the minority stake. They would not want to make the acquisition dilutive. Oracle trades at 27.42 earnings and OFSS 16x times, so you can calculate the ceiling Oracle would pay. I am not sure of the tax implications, that would also be a factor too.

Pls correct me if wrong, oracle holds majority stake in OFSS and not minority? Also what do you mean by acquisition dilutive? Thanks

This should also indicate how cheaply OFSS trades. You have no downside with 10% kind of profit growth and 5%+ div yield. This itself should ensure decent returns in range of index. any corporate event is icing on the cake which has 80% upside. Typical Dhandho investor stock.

Opportunity cost is only for traders/momentum guys who can beat index by wide margin. May be a very minuscule minority. Most of normal investors don’t fall into the category where this is an opportunity cost.

Another reason why this trades cheap is lack of understanding of business. Was chatting with a veteran investor/HNI. He was equating this with MNC pharma subsidiary where new launches are from unlisted subsidiary.

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I meant dilutive for Oracle corporation. Any price for OFSS more than Oracle’s own P/E multiple they are better off buying back their own shares rather than OFSS.

I doubt the possibility of 10% PAT growth in future. Last 5 yrs, revenue has grown at 3% CAGR and PAT at 9%. The PAT growth of 9% is due to OPM expansion from a median 40% to peak of 50%. If OPM reduces back to 40%, then growth stagnates or even if OPM sustains at 50%, PAT growth will be equal to revenue growth (3% as of now) in future. Any views ?

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This profit growth is sustainable as they have been reducing services and products have higher margin which has grown faster than 3%. Also they are moving to SaaS model where revenue recognition is not upfront like license fee but recognized as software is used.

This report explains things in detail. Good growth in pipeline

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The issue is this - Its not clear how OFSS stands in the promoter(Oracle’s) overall scheme of things? How much are they incentivised to increase the valuation of this Indian subsidiary?

I hazard a guess, but in bear market,they will await a fall in share price and then take it private thru delisting.
If someone has contacted management, maybe they can clarify on above.

Disclosure :- Not invested

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I think they got enough opportunity during 2020 crash, never heard of any such intent so far. Many other companies did talk about delisting during the crash…some did and some did not eventually.

One question - is Indian listed OFSS the only Oracle entity hosting the entire BFSI product/SaaS capability or is any part of this OFSS is listed anywhere else in world also?

I think, if they have to delist and are sure, they would not look much at the market situation and go ahead with it. Regarding sale - I do not think they would sell a product which is doing well and has huge runway if execution is right. The other part is do nothing…which seems more probable currently.

Point to note is that none of the Foreign IT MNCs are listed in India except those that became out of special situation such as OFSS via acquisition. This could be because they get similar or superior valuations in US as well for IT/Tech and their market is not in India, its only their workforce.

However, looking at current US tech meltdown, even US companies may look to diversify their market presence eventually…unless they want to keep everything private…just a thought

Disc: Above all are assumptions & post only for academic purpose. I can be wrong in all my assessments