Accumulate Sonata Software; target of Rs 1087: KR Choksey

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KR Choksey’s research report on Sonata Software

Sonata Software Ltd (SSOF) Q2FY22 performance was lower than our estimate. Dollar Revenue was up materially by 11% QoQ to USD 49.4Mn (KRChoksey est. USD 48Mn). Rupee revenue grew by ~20% YoY to INR 9,632Mn (KRChoksey est. INR 13,884Mn). Reported operating margin witnessed an sharp uptick of 438bps to 11.6% QoQ and reported net profit grew by 5.1% QoQ to INR 912Mn (KRChoksey est. INR 928Mn) with margin of 9.5%, up 263bps. In-spite of a seasonally weak quarter (Q2FY22), domestic business performed well on YoY basis. International IT services witnessed a strong growth momentum backed by strong execution in platform, IP and alliance led businesses. Growth was broad based across the US (+13.7% QoQ), Europe(+7.3% QoQ) and RoW (+9.5%), mainly driven by ISV (+5.9% QoQ), Retail Essential (+8.7% QoQ), Distribution & Manufacturing (+5.3% QoQ) and Commodity business & services (+3.6% QoQ). The deal pipeline continues to be healthy and strong through multiple new digital wins from existing and new customers. Our target price of INR 1,087 is based on 26x Mar-24E EPS with EPS CAGR of 17.5% over FY22-24E.

Outlook

Sonata Software is currently trading at a valuation with a P/E multiple of 26.4x/23.3x on FY23E/FY24E earnings. We expect strong deal momentum across geographies, higher focus on ISV and Retail (Essential/Non-Essential), and tailwind in Managed Cloud Services will aid growth over the medium to long term in future and hence we are assigning a P/E multiple of 26x to the FY24 estimated EPS of INR 41.8 to arrive at a target price of INR 1,087 per share (earlier target of INR 1,001 ), an upside of 11.5% over the CMP. Accordingly, we maintain our rating to an “ACCUMULATE” to the stock.

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