Emkay Global Financial's research report on Sonata Software
Sonata posted a weak operating performance in International IT Services (IITS) in Q4. IITS revenue declined 7.2% QoQ CC, below our expectations. The decline was majorly attributed to higher-than-expected ramp down at a large TMT client, along with Quant seasonality. IITS EBITDAM rebounded by 190bps QoQ to 16.5%, albeit coming below our estimate. Sonata secured two large IITS deals in Q4 with order booking of ~USD100mn and book-to-bill of ~1.25x. The mgmt anticipates some stability returning in its large TMT client in Q1FY26. It expects a recently signed large deal with the TMT client (TCV: USD73mn) to start ramping up gradually in Q1, with major contribution expected from Q2. Also, it believes the Quant business would fully recover in Q2, and drive normalcy in growth in H2. We cut FY26-27E EPS by 6-7%, factoring in the Q4 miss. Weak performance in IITS and uncertainties around domestic business growth prospects with change in Microsoft strategy (prioritizing direct sales to large enterprise clients) would weigh on stock performance in the near term, in our view, particularly after the recent up move.
Outlook
Given the undemanding valuation and expectation of a gradual recovery in FY26, we retain BUY while trimming our TP by 5% to Rs475 at 22x Mar-27E earnings.
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