Oracle’s Q1FY09 top-line came in line with our rough expectations and above the Wall Street consensus.
Quarter was led by strength in database and middleware licenses and steady maintenance streams. We note weakness in application licenses (particularly in EMEA) as a sign of thickening macro haze in the Euro region.
While we cannot extrapolate Oracle’s strength to Indian IT services (largely because of favorable market share shifts, entrenched database franchise and sub 10% exposure to financial services), we view weakening license sales with some concern.
We believe that the strong overall license sales are a ’sentiment positive’ for the PI businesses of Tier-1 IT players, and could stem the free fall in the IT sector. We, however, believe that such reprieve could be temporary.
Being an important lead indicator for the downstream services companies, Oracle’s performance might stem the fall in the Indian IT services companies.
We would, however, wait for further weakening of applications business before reading anything material in the results.
The stock is currently valued at 12.8x Street FY09 EPS estimates (with ROEs of 29.3% and EBITDA margins of around 43%). This compares against Infosys at 15.9x our FY09 EPS estimates and the low teen PEs of other Tier-1 players.
We retain our UNDERPERFORM rating on Infosys and SELL rating on Wipro, TCS, HCL Tech and Tech Mahindra.