Commentary and execution remain strong
* Nucleus reported strong performance, with revenue growing 21% to Rs1.2bn, well ahead of our expectations of 18% growth. Growth was driven by strong new order wins (10 new orders) and robust go-lives (12 implementations concluded) in the quarter.
* The Product segment’s order book for the quarter stood at Rs3.3bn — slightly lower on a yoy basis — a bit disappointing but management attributed this to slower decision making, longer negotiations, and legal processes. It continues to remain confident on opportunities given the healthy pipeline and the differentiated product offering.
* EBIT margins improved 500bps to 17.3% on a yoy basis, ahead of our expectations of ~15% on strong operating leverage. We believe that profitability will continue to improve gradually as it gains scale both on license revenue and cloud deal billing fronts.
* The stock offers strong growth potential (expects revenue/EPS CAGR of ~12%/18% over FY18-23E) and attractive valuations (trading at ~8x on a TTM EPS/EV basis). We maintain our Buy rating on the stock, with a DCF-based TP of Rs640.
Management commentary and strong execution continue
The company remained confident in its overall commentary on the business across products and markets. The company does not see any bottlenecks with regard to demand from the ongoing NBFC issue in the Indian market for its lending product offering (FinnOne) as it continued strong deal wins in the quarter both from existing/new clients (five new logos were added in the quarter). The corporate banking product, FinnAxia, continues to make new strides across markets and is sitting on a strong pipeline, that too with much superior pricing given its advanced features in the recently released version FinnAxia 5.0, which was released in Mar’18. The company also hosted its first-ever ‘Partner Week’ as a network-building exercise for its various System Integrator partners across various geographies — South East Asia, Africa, and Japan — to share its product roadmap and overall Go-to-Market strategy (34 dedicated global sales team). The Services business segment, which contributed ~20% of revenues, reported 18% growth yoy and 13% qoq as it gained from its restructuring strategy, based on which the segment would now be independently driving its growth with independent focus/leader. We believe that the turnaround in the Services business could drive overall revenue growth for the business. The segment has been flat/negative on revenues for the last four years. The company wrote off about Rs30mn in the quarter for its Rs60mn exposure to the preference investments in IL&FS.
Business growth improving; valuation compelling; maintain Buy
Strong demand for existing solutions (Lending), promising order book, widening product portfolio, and an uptick in the Services revenue give us comfort on revenue growth visibility. The valuation looks compelling: EV/Sales stands at 1x, EV/EBIT at 6x, and PE at 12x FY20E EPS. We maintain our Buy rating and DCF-based TP of Rs640.
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