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Sonata Software - Supply-side headwinds impacting growth - ICICI Securities

Posted On : 2022-05-03 13:06:46( TIMEZONE : IST )

Sonata Software has reported international IT services (IITS) revenue of US$56m for Q4FY22, growing 4.3% QoQ US$. In CC terms, revenue grew 4.7% QoQ. The moderation in Q4FY22 was not due to demand/projects tapering but more on account of supply-side constraints (~2-2.5% impact). Management mentioned supply-side issues may limit growth in Q1FY23, and as it is ramping-up capacity, this issue will subside Q2FY23 onwards. Domestic product services (DPS) revenue grew +38% YoY, much higher than average 28% YoY growth in the last four quarters. Growth was driven by multi-year cloud-based annuity deals. Share of cloud-led revenue remained stable at 78%. Annuity revenue increased 100bps YoY to 76%.

IITS EBITDA margin came in at 27.5%, decline of 50 bps QoQ, while that of DPS came in at 3.8%, improvement of 130bps QoQ. IITS margin was impacted because of wage hikes given in Jan'22. Overall EBITDA margin for the quarter stood at 7.4%, up +30bps QoQ. Sonata intends to invest in global delivery centres, more onsite sales, retail, marketing and more offshore capability building competency which should possibly temper margins ahead. The company has sustained segmental IITS EBITDA margin above 27% (vs ~25-26% pre-covid) for past five quarters led by revenue growth leverage. We expect margins to come under pressure in near term led by supply-side cost pressures (wage increments, hiring, retention costs, etc.) due to higher attrition and increased investments. Our EPS estimates decrease by 10%/6% in FY23E/24E led by ~60bps cut in margin estimates (for FY23E) and cut of 2%/4% in revenue estimates.

The stock currently trades at 19x/16x on EPS of Rs39/47. Strong digital capabilities help the company to capture opportunities arising in the current demand environment. This, along with a strong EBITDA margin profile, makes Sonata an attractive stock at current levels. We value the company at 18x FY24E EPS with a target price of Rs851 and recommend ADD rating.

Shares of Sonata Software Limited was last trading in BSE at Rs. 741.35 as compared to the previous close of Rs. 754.05. The total number of shares traded during the day was 12401 in over 1329 trades.

The stock hit an intraday high of Rs. 746.50 and intraday low of 718.05. The net turnover during the day was Rs. 9130238.00.