Despite the decline in new license revenue, OFSS has seen healthy deal signings in the new license sales; bookings have grown 40% YoY to USD 28mn as on Q1FY19 led by the new OBP deal win. The management indicated of one more large OBP deal in the pipeline and expects license revenue to cross USD 100mn for full year FY19 (over 13% YoY growth in bookings) we have estimated license revenue growth of 14% YoY in FY19. This will have a positive impact on the implementation and maintenance revenue which is too slated to grow by 7% and 9% respectively in FY19; however, we expect growth in implementation not to be strong enough as large portion of the work continues to get passed on to partners. Services and KPO segment which contribute 11% of revenue together are expected to report muted single digit growth in the near term. Headwinds persist for the margin in product segment in the form of higher R&D in anticipation of new product launches; expect EBITDA margin to remain in a narrow band of 40.6%-41.3% over the next two years. We upgrade our earnings estimates by 9% for FY20/FY21 factoring positive impact of rupee depreciation and slightly higher growth imp./AMC revenue. We upgrade OFSS to an Accumulate (Reduce earlier) rating and rollover to a Sep’19 target price of ` 4,650 (` 4,250 earlier) based on 21.5x one-year fwd.
Upgrade to BUY. The stock has underperformed the BSE IT Index by 19% YTD and the PER gap vs. global peers such as Temenos has widened (43% vs. 3-year median of 11%). Valuations are also inexpensive compared with its Indian IT services peers; OFSS trades at c.4% PER discount to TCS (TCS IN; HOLD) vs. the 3-year median premium of 28%. With seasonally stronger quarters ahead, recovery in license sales growth should be easy to achieve – a potential trigger for rerating – in our view.
We believe, OFSS may outperform vs large cap IT peers given its better earnings growth prospects (CAGR of 9% - FY18-20); however, concerns remain regarding sustainability of new license revenue growth in the medium term as growth in the former is usually lumpy in nature. The stock is currently trading at fair valuations of 19.4x/17.3x based on FY19/FY20. We marginally revise our estimates (1.5%-3%) factoring better revenue growth; maintain our ACCUMULATE rating and rollover to Sep’18 TP of ` 3,900 (` 3,800 earlier) based on 19.5x one yr fwd. PER.