Shares of Sonata Software fell sharply by more than 15% in early trade on February 7, after it shared details of a client ramp down in a key vertical during Q3FY25, which it said will impact revenue for Q4FY25 as well.
"During the quarter, we had unplanned ramp down and one-time discount for a large hitech client, as a result, our TMT vertical de-grew," the company said during the earnings call after results. Sonata Software said it will have a 'full-quarter impact' on Q4FY25 due to the ramp down.
The company had expected strong growth in its Q4FY25 revenue in the past, but it now expects Q4FY25 to be a 'de-growth' quarter due to the sudden ramp down by the client. The ramp down will also have an impact on the Q3FY25 margin, as the EBITDA saw a negative impact, partially due to a one-time discount too.
The issue at Sonata's account led to a margin decline, said the company, with an impact of about 260 bps QoQ, because of the one-time severance payout. This cost, along with wage hikes and furloughs in the International IT business dented margins by about 360 bps for Q3FY25.
A 'ramp down' is a gradual fall in the service or engagement with a client, and may lead to termination of a contract or project.
The decision was taken by the customer as part of their own cost-optimization efforts, said Sonata, hence the account was ramped down in Q3FY25. "We think the impact will last till Q4FY25, but it might spill over to Q1FY26, but we cannot comment right now, but this will come back to growth trajectory in a couple of quarters," said the company on the impact on Intl IT services businesses.
The IT services firm reported a 1.4% QoQ fall in Q3FY25 consolidated net profit at Rs 105 crore, with profit from international services falling by 8.4% QoQ to Rs 57 crore. The consolidated EBITDA fell 7.8% QoQ to Rs 163.6 crore, and international services EBITDA saw a fall of 16.9% QoQ to Rs 107 crore. International services revenue was Rs 731.7 crore, a 3.4% QoQ rise, while domestic business grew by 44.4% to Rs 2111 crore.
Sonata said its deal wins were healthy, with a TCV of $107 million. Over 44% of the large deal pipeline for the company comes from Fortune 500 clients.
HDFC Securities said the brokerage is cutting its EPS estimates for FY26 and 27E by 9 and 8% respectively, factoring in growth challenges, and maintains 'Add' rating with a target of Rs 570 per share based on a FY27e EPS.
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