Buy Sonata Software; target of Rs 400: ICICI Direct

ICICI Direct's research report on Sonata Software

Sonata Software’s IT service revenues in constant currency grew 4.0% QoQ. Further, the company’s dollar revenues increased 3.4% QoQ to $39.1 million mainly led by 9.7% QoQ growth in digital revenues. Vertically, the company’s Dynamics AX business grew 14.9% QoQ. Geographically, Europe revenues grew 7.0% QoQ led by better growth & addition of two new clients and Rest of the World (RoW) revenues increasing 12.8% With healthy growth in IT service dollar revenues, rupee revenues increased 7.1% QoQ augmented by rupee depreciation. However, 25.4% QoQ decline in domestic revenues led to de-growth in overall rupee revenues (down 13.8% QoQ).

Outlook

This coupled with recent correction in the stock price has made the valuation attractive (trading at 13x FY20E EPS). Hence, we maintain our BUY rating on Sonata with a revised target price of Rs 400 (i.e. 16x FY20E P/E).