PPFAS maintains buy on Sonata Software

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PPFAS maintains buy on Sonata Software

PPFAS has maintained buy rating on Sonata Software as a low-medium risk + medium-high return proposition. The company has delivered a good quarterly earnings growth of 6.7% (standalone) & 9.2% (consolidated) on a Q-o-Q basis.

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PPFAS has  maintained buy rating on Sonata Software as a low-medium risk + medium-high return proposition. The company has delivered a good quarterly earnings growth of 6.7% (standalone) & 9.2% (consolidated) on a Q-o-Q basis.

PPFAS research report on Sonata Software

Triology

Outlook Summary Financials

The performance of Sonata Software is best analyzed by splitting the company in three key buckets. First it is the standalone entity which undertakes IT services business spread over multi-region & multi currencies, viz. USD, GBP & EUR. This is a buoyant business with decent growth & profit margins. Its subsidiary SITL is involved in product reselling business in the domestic region. It is a high growth business with very low margins but high return ratios. The third large pie is in form of TUI Infotech, the erstwhile IT arm of European major TUI group. Sonata acquired a majority 50.1% stake in this joint venture is the last fiscal. This will be a steady business with some amount of growth which may come in from non TUI business.

There is a potential for offshoring to the extent of 24 Million. Euros over one year timeframe. We maintain our positive view on Sonata which offers high visibility with attractive valuations. The steady sustained growth in its traditional businesses and it high profile acquisition in the tough German region speaks loud about the operational capabilities. The company is well diversified geographically with just about 25% of earnings exposed to the US markets.

Based on our detailed calculations, Sonata is valued at just 9.5x FY08E EPS of Rs. 5.06 and at 7.5 times FY09E EPS of Rs. 6.43. Please note that while we have accounted for a sharp average rupee appreciation for FY08E over FY07, in line with the current rates, we have not delved into forecasting the currency rates for FY09. The latest quarterly performance accounts for some adverse currency fluctuations. We maintain BUY on Sonata as a low-medium risk + medium-high return proposition.  

Valuation

Sonata has delivered a good quarterly earnings growth of 6.7% (standalone) & 9.2% (consolidated) on a Q-Q basis. The performance for the quarter was impacted by adverse USD rates, layoffs at TUI Infotech and higher taxation. The company took approx  Rs. 20 Million. hit on account of USD falling from Rs.43.47 to Rs. 40.70 during the quarter. During the quarter TUI Infotech replaced 20 employees with outside contractors. Going ahead we expect work to gradually start shifting to India. The management has indicated that the transition to offshore will be more visible from Q2. The management expects 40% of TUI Infotech's Services business to be offshorable over one years time. This works out to approx. 24 Million Euros. The taxation incase of TUI Infotech has gone up from 25% in last quarter to 43%. The management has suggested a sustainable tax rate of 35% for TUI Infotech. During the quarter Sonata added 7 new clients.