Sonata Software - Growth rebound - HDFC Securities

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

We maintain a BUY rating on Sonata; IITS growth was muted due to supply side issues (COVID impact) but DPS performance (+24% QoQ) was better-than- expected. The demand environment remains robust (added 13 new clients) and recovery is expected in the coming quarters. Microsoft related services (product engineering + dynamics) is ~50% of IITS revenue and is expected to deliver growth in high teens. The Microsoft Dynamics modernisation program is a multi-year opportunity and Sonata is constantly investing for fueling growth. Recovery in TUI (large travel client) will take place when leisure travel resumes. The IITS EBITDA margin contracted 115bps QoQ due to lower utilisation. In order to overcome the supply-side challenges, the company has stepped up hiring of freshers. The acquisition of Encore Software Services will add ~9% to revenue and EBITDA margin is in the range of 15-18%. DPS growth was driven by higher cloud license sales (~75%) and an uptick in annuity revenue. We increase our EPS estimates by +4.3/7.2% for FY22/23E due to the integration of Encore from Q2FY22. Our target price of INR 870 is based on 20x June-23E EPS. The stock trades at a P/E of 24.6/19.6x FY22/23E, ~25% discount to tier-2 IT average.

Q1FY22 highlights: IITS revenue stood at USD 44.5mn (+1.6% QoQ), in line with our estimate of USD 44.2mn. Digital/IP-led/platform revenue contributed 68/35/20% to IITS revenue and grew +24/26/35% QoQ. ISV/travel/retail grew +2/3/13/12% QoQ while distribution segment remained flat QoQ. IITS EBITDA margin stood at 21.3% (-115bps QoQ) and DPS EBITDA margin stood at 3.4% (-75bps QoQ). Consolidated revenue was up 17.9% QoQ, led by healthy growth in DPS (+24.3% QoQ) and EBITDA margin stood at 8% (-162bps QoQ).

Outlook: We expect IITS growth of +25/+19.2% and DPS growth of +28.4/+20.4% for FY22/23E. IITS margin will be at 23/23.8% and DPS margin at 3.3/3.3% for FY22/23E respectively. Revenue/EPS CAGRs for FY21-24E are expected at +22/28%.

Shares of Sonata Software Ltd. was last trading in BSE at Rs. 843.3 as compared to the previous close of Rs. 813.45. The total number of shares traded during the day was 67481 in over 3774 trades.

The stock hit an intraday high of Rs. 850 and intraday low of 801.1. The net turnover during the day was Rs. 55887382.

Source : Equity Bulls

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