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Sonata Software - Strong execution - HDFC Securities

Posted On: 2021-10-23 09:06:08 (Time Zone: IST)


Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Vinesh Vala, Institutional Research Analyst, HDFC Securities

We maintain our BUY rating on Sonata, following strong growth of 11% QoQ (~5% organic) in the IT services segment (IITS) and better margin performance. Revenue from Microsoft related services (~50% of IITS) is driving growth (+10.6% QoQ), which is further expected to come in high teens. The Microsoft Dynamics modernisation program is a multi-year opportunity and Sonata is constantly investing in this area. Travel vertical has recovered but will accelerate with an increase in leisure travel (currently at ~50% of pre- COVID level). The IITS EBITDA margin expanded 365bps QoQ, despite supply side concerns, led by offshoring (~69%), higher utilisation (89%), and lower sub-contracting cost. The company has stepped up the hiring of freshers and attrition has touched 23-24% level; the target margin range for IITS is ~23- 24%. DPS was weak (seasonality), but the growth in DPS will be driven by higher cloud adoption (~77/75% of DPS is revenue is from cloud/annuity). Sonata's growth profile is sturdy, led by the Microsoft ecosystem, recovery in travel, and strong DPS business. We increase our EPS estimates by +3.6/3.3% for FY22/23E. Our target price of INR 1,050 is based on 22x Dec-23E EPS. The stock trades at a P/E of 21.9/18.6x FY23/24E.

Q2FY22 highlights: IITS revenue stood at USD 49.4mn with +11% QoQ growth, in line with our estimate of USD 49.2mn. Digital/IP-led/platform revenue contributed 70/35/22% to IITS revenue and grew +14.3/11/22.1% QoQ. Retail/ISV/distribution/travel grew +14/5.9 /5.2/4.5% QoQ. IITS EBITDA margin stood at 24.9% (+365bps QoQ) and DPS EBITDA margin stood at 5.6% (+214bps QoQ). Consolidated revenue decelerated by -24.1% QoQ due to a decline in DPS (-36% QoQ) and EBITDA margin stood at 12.8% (+482bps QoQ).

Outlook: We expect IITS growth of +24.9/+18.8/16.2% and DPS growth of +25.9/21.2/21.7% for FY22/23/24E. IITS margin will be at 23.8/23.7/24.3% and DPS margin at 3.1/3.5/3.5% for FY22/23/24E respectively. Revenue/EPS CAGRs for FY21-24E are expected to be +20/28%.

Shares of Sonata Software Limited was last trading in BSE at Rs. 798.70 as compared to the previous close of Rs. 834.15. The total number of shares traded during the day was 126005 in over 9496 trades.

The stock hit an intraday high of Rs. 841.65 and intraday low of 775.80. The net turnover during the day was Rs. 101157826.00.


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