Buy Sonata Software; target of Rs 375: HDFC Securities

HDFC Securities' research report on Sonata Software

Sonata delivered a decent quarter with slight miss on revenue but margin beat was a positive surprise. International IT services (IITS) revenue was up 1.1% QoQ (+3.0% CC) to USD 37.8mn, below our estimate of USD 38.5mn. IITS margin jumped to 22.2% (vs. our est. of 20.0%) due to higher IP-led revenue (+5.6% QoQ and 82% of incremental rev). The company is witnessing increased traction on the Microsoft Dynamic AX (Cloud ERP platform) and is a preferred ISV development center partner for Microsoft. Focus on IPs and Platforms is driving Digital revenue (33% of rev, +1.1/23.1% QoQ/YoY). We expect IITS’ USD revenue to grow 11/14% with margin of 21.0/21.5% in FY19/20E.

Outlook

We like Sonata IP-focussed business model, capability to scale up top-accounts, quality balance sheet (net cash of Rs 50/share, ~15% of Mcap), high RoE (~31%) and high dividend yield (~3.2%). Maintain BUY with a TP of Rs 375 based on 16x FY20 EPS.