Mr. Amit Chandra & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities.
Sonata posted a weak quarter; the fall in IT services (IITS) revenue (-19.6% QoQ organic) was higher-than-estimated, but margin expansion of 104bps QoQ came as a positive surprise. The impact on IITS was due to an issue in one large travel client (down ~80% QoQ); ex-travel, its revenue was up 1.2% sequentially. Sonata has invested in strengthening the Microsoft relationship, which has yielded positive results (4Y CAGR of 19%). Dynamics D365 related services (34% of revenue) has grown at an eight-quarter CQGR of 7.8%. Furthermore, the margin expansion in IITS was led by a reduction in cost, offshoring and higher IP-Led revenue. The IITS margin will be maintained in the range of 21-22%. DPS growth was strong (+12.2% QoQ), but higher discounts impacted margins. Higher cloud license sales should lead to growth in DPS, but discounts could impact profitability. We like Sonata's IP-led business model, highest margin (IITS) in Tier-2 IT, focus on high growth Microsoft ecosystem, healthy RoE (~38%), and high dividend yield (~5%). We cut our EPS estimate by 2.3/6.2% to factor in the near-term growth challenges and lower DPS margin. The stock is trading at a P/E of 13/11x FY21/22E, in line with the five-year average multiple. We increase our target multiple to 12x (vs. 11x) to arrive at a target price of Rs 320, based on June-22E EPS.
1QFY21 highlights: IITS revenue declined 17.8% QoQ to USD 36.5mn vs. estimate of USD 38mn. The decline was led by travel (-85% QoQ) and non-essential retail (-17.8% QoQ) verticals. The recovery in travel will be gradual and will reach ~50% of 4QFY20 level by 4QFY21. IP-led revenue was up 5.5% QoQ and supported margins. Consolidated revenue was up 2.6% QoQ, and EBITDA margin stood at 8.2% (vs. the estimate of 8.3%). Microsoft (SI + Product Engineering + AX up-gradation) is ~60% of IITS revenue.
We expect IITS revenue to recover from 2QFY21; IITS growth ex-TUI for 2/3/4Q is expected to be 0.4/1.7/1.8% QoQ. IITS margin is expected to be at 21.1/21.4% for FY21/22E.
Shares of SONATA SOFTWARE LTD. was last trading in BSE at Rs.283.05 as compared to the previous close of Rs. 290.3. The total number of shares traded during the day was 41964 in over 1476 trades.
The stock hit an intraday high of Rs. 290.5 and intraday low of 272. The net turnover during the day was Rs. 11838529.