Maintain BUY on Sonata Software - Better-than-expected recovery - HDFC Securities

Mr. Amit Chandra & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities

We maintain BUY on Sonata based on robust recovery and better operating performance. IT Services (IITS) revenue grew 6.8% QoQ (estimate 3%) and margin expanded 126bps QoQ (estimate flat QoQ). The growth in IITS was led by a sharp recovery in travel client (TUI), while ex-TUI, IITS revenue was up 1.6% sequentially. The Microsoft services portfolio (~47% of IITS revenue) was down 5.6% in the quarter due to the completion of projects, but the recovery will happen in 2H, based on the strong pipeline. The Microsoft Dynamics modernisation program is a multi-year opportunity, and the company is going to invest in R&D and sales capabilities to fuel growth. The margin expansion in IITS was led by the reduction in cost, offshoring and higher IP-Led revenue. The IITS margins will be maintained in the range of 21-23%. DPS growth was strong (+31.2% YoY) and margins expanded by 126bps QoQ. Growth in DPS will be led by higher cloud license sales, and profitability will be maintained. 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 increase our EPS estimate by 4.5/1.7% for FY21/22E to factor in growth and margin recovery. The stock trades at a P/E of 14.2/12.5x FY21/22E, in line with 5Y average multiple. We arrive at a target price of Rs 400, based on 14x Sep-22E EPS.

2QFY21 highlights: IITS revenue increased 6.8% QoQ to USD 39mn vs. estimate of USD 37.6mn. Recovery was led by travel (+167% QoQ, at 40% of the pre-COVID level) and essential retail (+31.8% QoQ). The recovery in travel vertical will be muted in 2H due to fear of second wave and lockdown in Europe. Digital is now 60% revenue as the revenue backfill is digital in nature. Consolidated revenue was down 15.6% QoQ due to DPS (-23.2% QoQ), and EBITDA margin stood at 10.9% vs. the estimate of 10.6%. Microsoft portfolio (SI + Product Engineering + AX up-gradation) is ~60% of IITS revenue.

We expect IITS growth to continue in 2HFY21 and growth ex-TUI for 3/4Q to be 2.4/2.5% QoQ. IITS margin will be at 21.9/22.4% for FY21/22E.

Shares of SONATA SOFTWARE LTD. was last trading in BSE at Rs.345.05 as compared to the previous close of Rs. 339.35. The total number of shares traded during the day was 18954 in over 752 trades.

The stock hit an intraday high of Rs. 351.8 and intraday low of 333.1. The net turnover during the day was Rs. 6553774.

Source : Equity Bulls

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