KR Choksey's research report on Sonata Software
Sonata Software Ltd (SSOF) Q3FY22 performance was higher than our estimate. Dollar Revenue was up materially by 9% QoQ to USD 53.4Mn (KRChoksey est. USD 52Mn). Rupee revenue grew by ~33% YoY to INR 18,580Mn (KRChoksey est. INR 17,136Mn). Reported operating margin stood at to 6.4% and reported net profit grew by 7.1% QoQ to INR 977Mn (KRChoksey est. INR 994Mn) with margin of 5.3%. In Q3FY22, domestic business performed well, up 33% YoY basis. International IT services witnessed a strong growth momentum (+31% YoY) backed by strong execution in platform, IP and alliance led businesses. Growth was broad based across the US (+11% QoQ), Europe(+2.5% QoQ) and RoW (+2.3% QoQ), mainly driven by ISV (+31.4%), Retail Essential (+9%), Distribution & Manufacturing (+20%) and Travel (+9.4%). 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.
Sonata Software is currently trading at a valuation with a P/E multiple of 23.3x/20.6x 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, an upside of 26% over the CMP. Accordingly, we upgrade our rating to an “BUY” from “ACCUMULATE” to the stock.
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