Sonata Software - Q4FY22 Result Update - Supply side pressures impacting growth and margins in IITS - Downgrade to 'Accumulate'

Ms. Aditi Patil - Research Associate at Prabhudas Lilladher.

Quick Pointers:

- Supply side constraints resulted in revenue miss of ~2-2.5% in IITS business

- Segmental IITS EBITDA margin of 27.5% -50bpsQoQ/-90bpsYoY is led by substantial compensation increase in Jan 22.

We downgrade Sonata's rating to 'Accumulate' (earlier BUY) with revised TP of INR 833 (earlier: 1065) as we reduce target multiple to 18x (earlier 21x) given supply side challenges are not only impacting margins but also limiting revenue growth in IITS business. Our EPS estimates decrease by 10%/9% in FY23/24 led by ~80bps/66bps cut in margin estimates. Revenue estimates increase by 2.9%/1.7% for FY23/24, due to strong exit growth rate in DPS business.

Moderation in IITS revenue growth in Q4 was led by order fulfillment challenges due to supply side constraints which resulted in revenue miss of ~2-2.5%. Supply side challenges due to high attrition (30% in Q4 and 27% in FY22) is likely to limit growth in Q1FY23 as well. Growth in digital revenue (data analytics, Microsoft and Open source Platformation services, cloud managed services etc.) continued to be strong with 8.5% CQGR over past 4 quarters. We believe margins in IITS business will remain under pressure for next 2-3 quarters due to supply side cost pressures and investments towards strengthening sales team and digital capabilities. DPS business continued its strong growth momentum +38% YoY in Q4 led by cloud-based annuity deals.

We value Sonata 18x (earlier 21) on FY24 EPS of INR 46 to arrive at changed TP of INR 833 (earlier: 1065). The company is currently trading at 19x/16x on FY23/24 earnings of INR 39/46 with Revenue/EPS CAGR of 15%/13% over FY22-24E. Downgrade to 'Accumulate' (earlier BUY).

Shares of Sonata Software Limited was last trading in BSE at Rs. 754.05 as compared to the previous close of Rs. 749.25. The total number of shares traded during the day was 4433 in over 494 trades.

The stock hit an intraday high of Rs. 769.90 and intraday low of 740.05. The net turnover during the day was Rs. 3366633.00.

Source : Equity Bulls

Keywords

SonataSoftware INE269A01021 Q4FY22 ResultUpdate PrabhudasLilladher