Oracle Corporation - Americas Licence Growth A Positive Read-Through - Nirmal Bang

Oracle's new software licence sales and cloud software subscription (NSLS & CSS) in 1QFY13 posted growth of 5.1% YoY (6.7% YoY in 4QFY12). In constant currency (CC) terms, NSLS & CSS grew 10% YoY, the second consecutive quarter of double-digit growth. This is a positive for Indian IT discretionary revenue, which could enable back-ended growth to materialise in 2HFY13, something we had highlighted in our 4QFY12 review of Oracle's results also. Another positive takeaway for Indian IT is NSLS & CSS growth of 12% YoY in the Americas region (14% CC), the third successive quarter of double-digit growth. However, Europe remains under stress, with this being the third consecutive quarter of decline in NSLS & CSS revenue (8% YoY, 1% growth in CC terms). At this point, we believe there is little scope for upside in top-tier IT stocks in light of the recent run-up. MindTree remains our sole Buy recommendation on valuation comfort (Target price: Rs820).

Decent NSLS & CSS growth could drive back-ended growth in 2HFY13: Oracle's NSLS & CSS sales in 1QFY13 (quarter ended 31 August 2012) grew 5.1% YoY (6.7% YoY in 4QFY12). In CC terms, NSLS & CSS revenue grew 10% YoY, the second successive quarter of double-digit growth. This is encouraging for Indian IT, as NSLS & CSS is typically a lead indicator of package implementation (PI) and consulting revenue. This is also a positive for Indian IT discretionary revenue and could drive back-ended growth in 2HFY13, something we had highlighted in our 4QFY12 review of Oracle's results also. This has also been alluded to by Infosys, Wipro and MindTree among other IT firms.

Americas' NSLS & CSS growth heartening: A positive takeaway during the quarter for Indian IT, as was the case in the previous quarter also, is that Oracle's NSLS & CSS revenue in the Americas region grew 12% YoY (14% CC growth), the third successive quarter of double-digit growth. This is a sign that discretionary spending by US corporations is in good shape. For Indian IT firms, given that the US is by far the largest market (55-65% of revenue for the industry), this strong growth is a good sign and again, a pointer to the possibility of back-ended growth materialising in 2HFY13.

Europe under stress, NSLS & CSS revenue records third successive decline: Even as NSLS & CSS revenue in the Americas region has been heartening over the past three quarters, Europe remains under stress, with NSLS & CSS revenue in the Europe/Middle East/Africa region declining 8% YoY, the third successive quarter of decline (CC growth of 1% YoY). Given the economic issues in the region, it appears unlikely that NSLS & CSS revenue will show any recovery in the near future.

MindTree, our sole Buy recommendation: Oracle's NSLS & CSS revenue growth is likely to drive discretionary revenue for Indian IT in 2HFY13, thus leading to back-ended growth materialising. However, given the run-up in stock prices of top-tier Indian IT firms of late, we believe there is little scope for further upside. TCS, for example, trades at over 16x FY14E EPS. At this point, MindTree remains our sole Buy-rated idea in the IT sector given the company's improving margins, a 24.4% EPS CAGR over FY12-14E and supportive valuation of 8.4x FY14E EPS (Target price: Rs820).

Source : Equity Bulls

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