Recommendation from Computers - Software Sector

Recommendation from Computers - Software Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

Oracle Financial Services Software Ltd : Digitising The World

HERE IS WHY
✓ Extraordinary returns on capital employed
✓ Strong product growth
✓ Strong global presence of parent company

Oracle Financial Services Software Limited, with a majority owned by Oracle Corporation, is a world leader in providing IT solutions to the financial services’ industry. The company offers IT solutions in a wide range of segments including retail, corporate and investment banking, funds, cash management, trade, treasury, payments, lending, asset management, compliance, enterprise risk and business analytics and anti-financial crime, among others. Its prime product, ‘Oracle Flexcube’ offers complete banking solutions. The company’s revenues are driven through three main streams – license fees, annual maintenance contract fees and consulting fees.

It recorded net consolidated revenues of Rs 4,984 crore in FY21 compared to Rs 4,861 crore in FY20, which resulted in a growth of nearly 2.5 per cent. The increased revenues from its products business supported the top-line. The operating profit was at Rs 2,496.5 crore in FY21 as against Rs 2,300 crore in the previous year. That is a growth of over 8.5 per cent. Also, the PAT stood at Rs 1,762 crore while it stood at Rs 1,462 crore in FY20. PAT increased by 20.5 per cent. The company has been focused on customer acquisition across all business segments. It utilises machine learning and artificial intelligence for product development processes to serve better and faster.

The cash flows from its operating activities increased from Rs 1,522 crore in FY20 to Rs 1,920 crore in FY21 by 26.14 per cent. Net sales for the quarter ended September 2021 stood at almost Rs 1,281 crore. That is de-growth of 8.33 per cent on QoQ basis but growth of 7 per cent on YoY basis. The YoY growth was mainly driven by 65 per cent year-on-year growth in license booking and 8 per cent YoY growth in its products business. During the quarter, it booked license deals amounting to about Rs 1.65 billion. The EBITDA (exclusive of other income) was Rs 629.55 crore which saw a decline of 14.06 per cent QoQ but a rise of 11.7 per cent YoY.

The net profit number stood at Rs 447.55 crore, again a decline of 14.62 per cent QoQ and a growth of 14.15 per cent YoY. The company has posted high profit margins as the operating margin stood at 47 per cent and the net profit margin was strong at 35 per cent. The company’s dedicated in-house research and development centres have produced products which are used by banks in more than 150 countries around the world. It benefits from the expertise and technology of its parent company, Oracle Corporation, as the company is well-equipped to respond fast to the changing market dynamics. Financial institutions are increasingly updating and investing in software solutions to help drive innovation, flexibility and support various operating models.

The increased need for digitisation, digital engagement and increasing utilisation of cloud services in the financial industry provides great opportunity for growth in the industry. It has a relatively strong dividend yield of 4.9 per cent. The company is debt-free and has a good track record of high ROE and ROCE as well. On the returns front, it has delivered high ROE of 26.91 per cent and even higher ROCE of 37.21 per cent. The stock price is trading near the price-to-earnings multiple of 18.5. We expect that the management’s focus on making continuous investment in building product capabilities would drive growth in the future. And thus, based on our due diligence, we recommend our readerinvestors to BUY the scrip.

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