Sonata Software Ltd. share price target

The travel vertical contribution to revenues declined from 22% in Q4FY20 to 4% in Q1FY21 mainly due to its exposure to top client (~20% of revenues), which is in the travel vertical from European region. The company expects a gradual improvement in revenues from top client from Q2FY21E onwards and expects its contribution to improve from current ~3% of topline to ~10% of topline by Q4FY20E. Further, we expect other verticals like Independent Software Vendor (ISV), essential retail, utility and commodity service to improve in coming quarters. However, considering the significant...

Sonata Software reported poor Q4FY20 results. IT service revenues in dollar terms fell 5.1% QoQ mainly due to Covid-19 pandemic and its exposure to impacted vertical like travel (down 12.7% QoQ, accounts for 23% of revenues) & retail (down 5.1% QoQ, accounts for 28% of revenues). IT service EBITDA margin also declined ~560 bps QoQ while PAT declined 22% QoQ. Overall revenues declined 25% QoQ mainly led by 33% decline in domestic product business. Overall PAT declined 19% QoQ to | 61.8 crore, mainly led by 22% QoQ decline in IT service revenues and one-time...

The spread of Covid-19 has led to lockdowns in many countries globally and could have adverse economic implications. In addition, the recent fall in crude prices could also have an adverse impact of fiscal health of oil producing countries. As a result, IT companies, which have considerable exposure to verticals such as oil, energy & utilities; banking & capital markets; manufacturing and travel & transport could see an adverse impact from the ongoing crisis. Companies like Wipro, Infosys in large cap and MindTree, NIIT Tech, Sonata software, Cyient, Accelya Solutions among...

The spread of Covid-19 has led to lockdowns in many countries globally and could have adverse economic implications. In addition, the recent fall in crude prices could also have an adverse impact of fiscal health of oil producing countries. As a result, IT companies, which have considerable exposure to verticals such as oil, energy & utilities; banking & capital markets; manufacturing and travel & transport could see an adverse impact from the ongoing crisis. Companies like Wipro, Infosys in large cap and MindTree, NIIT Tech, Sonata software, Cyient, Accelya Solutions among...

Sonata's platformation strategy to provide IT services around IPs is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Sonata is expanding Microsoft D365 platform and IP-led related services to new clients across verticals and geographies, which will drive growth. We like Sonata's IP-focussed business model, high RoE (~35%) and dividend yield of ~5%. The stock trades at a P/E of 11.0x FY21E, which is at 20% discount to Tier-2 IT median valuations. We expect IITS' USD revenue to grow 11.8/11.5% with margin of 23.3/23.7% in FY21/22E. Risks include deceleration in top-account, delay in collections and slowdown in US/Europe. We maintain BUY on Sonata based on strong performance in 3QFY20. IP-led strategy, strong Microsoft partnership and expansion of Microsoft D365 offerings is driving growth and aiding margin expansion in IT services business. DPS growth momentum will continue led by Microsoft and there is scope for margin expansion. We upgrade our FY22E Rev/EPS estimate by 6.1/5.1%. Our TP of Rs 422 is based on 12x (~4% premium to 5Y avg.) Dec-21E EPS.

Sonata's platformation strategy to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina, is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Sonata's strategy to venture into different areas within the top-account will aid growth and reduce dependency on a single platform. We like Sonata's IP-focussed business model, high RoE (~35%) and dividend yield of ~4%. The stock trades at a P/E of 10.2x FY21E, which is inexpensive but will command higher multiple only with better receivables management. We expect IITS' USD revenue to grow 13.8/11.1% with margin of 22.6/23.0% in FY20/21E. Risks include deceleration in top-account, delay in collections and slowdown in US/Europe. We maintain BUY on Sonata based on inline revenue but slight miss on margins in 2QFY20. IP-led strategy is driving IITS growth (+9.1% 8qtr CQGR) and is aiding margin expansion (+133 bps YoY). We downgrade P/E multiple to 12x from 14x to factor in rising receivables in the DPS business. Our TP of Rs 395 is based on 12x Sep-21E EPS.

IITS Revenue Slightly Soft, IP-Led Biz Continues Upward Journey Sonata Software's USD revenue from IITS business rose by 2.3% QoQ (+3% QoQ in CC terms) to US$45.3mn, slightly below our estimate by 0.8%. In INR terms, IITS revenue rose by 2.7% QoQ to Rs3.13bn. Organic revenue excluding Sopris contribution in 1QFY20 came in at a strong 4.1% QoQ, similar to 1QFY20. Growth would have been higher had it not been for some delayed licence revenue in Sopris. Vertical-wise, revenue was led by healthy growth in the Travel vertical (+6.2% QoQ in USD terms especially after 5.4% QoQ decline in 1QFY20). On the other hand, revenue from OPD vertical grew by 2.3% QoQ, in-line with company average. A...

Sonata's platformation strategy to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina, is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Microsoft Dynamic 365 is in growth phase and Sonata being a preferred development partner is reaping benefits. Sopris and Scalable Data will enhance Dynamics 365 offerings and will support growth. We expect IITS' USD revenue to grow 13.6/11.1% with margin of 23.4/24.0% in FY20/21E. We like Sonata's IP-focussed business model, high RoE (~35%) and dividend yield of ~4%. The stock trades at a P/E of 11.2x FY21E, which is reasonable. Risks include high client concentration, slow down in Dynamics 365 portfolio and drop in margins due to onsite investments. We maintain BUY on Sonata based on inline 1QFY20. IP-led strategy is driving growth for the past ten quarters (+10.3% CQGR) and is aiding margin expansion. We downgrade multiple to 14x from 16x to factor in growth moderation (ex IP-led) and high dependence on few clients. Our TP of Rs 421 is based on 14x June-21E EPS.

Growth in the quarter was primarily led by acquisition, consolidation while organic growth was flat. However, the management expects organic growth to be back on track in Q2FY20E. Further, IP led business along with digital are expected to gain momentum in coming years led by its platformation and alliance led strategy and are expected to be primary growth drivers for the company. Taking this into consideration and consolidation of two acquisitions, we expect IT services revenues to clock rupee revenue CAGR of 15.9% in FY19-21E. However, domestic revenues, which constitute a...

IITS Revenue Slightly Soft, IP-Led Biz Continues Upward Journey Sonata Software (SSOF) posted a soft performance in 1QFY20, with its USD revenue from IITS Business rising by 1.8% QoQ to US$44.3mn, missing our estimate by 2.1%. The entire revenue growth was led by full consolidation of the acquisition of Sopris Systems, while organic revenue growth remained flat in USD terms. In CC terms, total revenue rose by 2.7% QoQ, while organic CC growth was ~1% QoQ. Lower revenue in the Travel vertical (down 5.4% QoQ in USD terms) was the main driver for the softer-than-expected revenue. This was owing to growth not coming in as expected, with deal ramp-up slower-than-expected. Given that Travel is mainly...