Maintain BUY on Sonata Software - Growth visibility improves - HDFC Securities

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

Sonata posted better-than-expected growth in the IT services business (IITS), led by strong growth in Microsoft portfolio (+10.2% QoQ) and recovery in Travel (+9.0% QoQ). Revenue from Microsoft related services (product engineering + dynamics implementation and upgrade) is now ~50% of IITS and is expected to deliver high teens growth. The Microsoft Dynamics modernisation program is a multi-year opportunity and Sonata is constantly investing in this segment. Travel has recovered but TUI will accelerate when leisure travel resumes in Europe (expected in 2Q). The IITS EBITDA margin contracted 543bps QoQ due to a wage hike, which was higher than the historical average. The company has stepped up hiring; offshore and utilisation (89%) are at peak levels, while the target margin range for IITS is ~22-24%. DPS growth was impressive (+26% YoY), driven by higher cloud adoption (~75% of DPS is cloud) and annuity revenue. Sonata's growth profile is improving, led by the Microsoft ecosystem, recovery in Travel, and traction in DPS business. We increase our EPS estimates by +3.6/3.7% for FY22/23E and multiple to 18x (earlier 16x). Our target price of INR 685 is based on 18x FY23E EPS. Maintain BUY. The stock trades at a P/E of 18.8/15.4x FY22/23E.

4QFY21 highlights: IITS revenue stood at USD 43.8mn (+6.2% QoQ CC) vs. an estimate of USD 42.4mn. Digital/IP-led/Platform revenue contributed 67/34/18% to IITS revenue and grew +12/10/7% QoQ. ISV/Travel/Retail/Distribution grew +9/9/14/12% QoQ. IITS margin stood at 22.4% (-543bps QoQ) due to wage hike (11-12%) while DPS margin stood at 4.2% (+169bps). Consolidated revenue was down 23% QoQ due to DPS (-30.7% QoQ) and EBITDA margin stood at 9.6%. Net cash stood at INR 5.3bn (~9% of MCap); RoE is at 34% and dividend yield is at ~3%.

Outlook: We expect IITS growth of +18.6/+15.0% and DPS growth of +20.2/+20.3% for FY22/23E. IITS margin will be at 23.4/23.8% and DPS margin at 3.1/3.3% for FY22/23E respectively. Revenue/EPS CAGR for FY21- 23E are expected at +17/22%.

Shares of SONATA SOFTWARE LTD. was last trading in BSE at Rs.580.95 as compared to the previous close of Rs. 586.55. The total number of shares traded during the day was 27784 in over 1272 trades.

The stock hit an intraday high of Rs. 612 and intraday low of 572.5. The net turnover during the day was Rs. 16355802.

Source : Equity Bulls

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