KR Choksey's research report on Sonata Software
SSOF’s Q3FY25 result missed our expectations. The company reported revenue of INR 28,428 Mn, up 14.0% YoY (+31.0% QoQ). EBIT stood at INR 1,313 Mn, down 24.5% YoY (-9.0% QoQ). EBIT margin stood at 4.6%, down 236bps YoY (-203bps QoQ). Adj. PAT stood at INR 1,050 Mn, down 18.3% YoY (-1.4% QoQ). PAT margin stood at 3.7%, down 146bps YoY (-121bps QoQ). We reduce our FY26E/FY27E estimates by 20.7%/16.8% to INR 26.1/31.7, factoring in weaker than anticipated Q3FY25 performance and persistent margin pressures stemming from a large ramp-down in the TMT vertical. The spillover is likely to extend for 2-3 quarters, with an anticipation that margins would likely recover from H2FY26E. We roll over our valuation to FY27E and assign a P/E multiple of 25.0x, to arrive at a target price of INR 517 (previously: INR 679). Despite these near-term headwinds, we believe this represents a temporary setback, given Sonata Software's strategic expansion into AI-driven modernization, cloud transformation, and enterprise partnerships. The company’s cost optimization measures and operational efficiencies are expected to aid in margin stabilization, supporting long-term growth. While we remain cautiously optimistic, we will closely monitor the pace of margin recovery in the coming quarters and maintain our ACCUMULATE rating on SSOF.
Outlook
Based on the recent developments, we reduce our FY26E/FY27E estimates by 20.7%/16.8% to INR 26.1/31.7. We roll over our valuation to FY27E and assign a P/E multiple of 25.0x, to arrive at a target price of INR 517 per share (previously: INR 679).
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