Sonata Software Ltd. share price target

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...

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 hyper growth phase and Sonata being a preferred development partner is reaping benefits. Sonata strategic acquisition of Sopris and Scalable Data will enhance Dynamics 365 offerings and will support growth. We expect IITS' USD revenue to grow 15/11% with margin of 22.6/23.0% in FY20/21E. We like Sonata's IP-focussed business model, strong relationship with top-clients, high RoE (~35%) and dividend yield of ~3%. The stock trades at a P/E of 11.9x FY21E, which is reasonable (~10% discount to tier-2 IT median). Risks include high client concentration, slow down in Dynamics 365 and drop in margins due to onsite investments. We maintain BUY on Sonata based on inline 4QFY19. Robust growth in IP-led revenue (+41% YoY) and margin expansion in IITS (~483 bps in FY19) is encouraging. Our TP of Rs 480 (+34% upside) is based on 16x FY21E EPS.

Sonata's IT services business grew 12% YoY to $161.2 million in FY19 driven by digital (grew 21.6% YoY, 35% of services revenue) and IP led (42.5% YoY, 19% of revenue). These two verticals are expected to gain traction over the coming years led by its platformation and alliance led strategy and are expected to be primary growth drivers for the company. Further, addition of leadership in digital segment (two in digital advisory and one in digital deli every) and sales head is expected to drive the company's deal pipeline. This coupled with consolidation of acquisition leads us to upgrade our IT services...

The IT service revenues increased 5.0% QoQ in constant currency terms. In dollar terms, revenues increased 4.3% QoQ mainly due to headwinds from cross currency. The rupee appreciation further...

Maintain BUY with a TP of Rs 466 based on 16x Dec 20 EPS. Sonata delivered a good quarter, International IT services (IITS) revenue was up 4.3% QoQ (+5.0% CC) to USD 40.8mn, in-line with our est of USD 40.3mn. Growth was led by IP-led revenue (+10.7% QoQ) and continued traction in Top-5 accounts (+10.5% in 9MFY19). IITS margin expanded 779bps QoQ to 28.4% (highest ever) led by cut in high cost sub-con expenses, higher utilisation and operational efficiency.