Buy Sonata Software; target of Rs 503: Prabhudas Lilladher

Prabhudas Lilladher's research report on Sonata Software

Sonata’s IT services revenue growth was driven by ISV (grew 15% QoQ), retail & travel. In terms of verticals, growth was led by ISV (independent software vendors) business (+15% QoQ USD, +8% YoY USD) which includes work done for Microsoft dynamic and other platform services clients. This is also reflected by strong growth in Digital Platformation Services (Microsoft & Open source), +11% QoQ USD. Overall consolidated revenues grew at healthy rate of 8.3% YoY USD led by strong growth in DPS (+110 QoQ USD, +12% YoY USD) and steady growth in IITS (5.1% QoQ USD, -12.4% YoY USD). IITS margins were highest ever at 29% led by improved realization, utilization, offshoring & revenue productivity. We believe that IITS margins will come down to steady levels ~26% once travel and facility costs come back. We expect healthy revenue momentum given huge opportunity in digital platforms & cloud. The compensation hike across the board, effective 1st Jan, will result in some headwinds to margins. We expect IT services to register a CAGR of 11.6% over FY21-23E & growth in domestic business to register a CAGR of 10% over FY21-23E.

Outlook

We believe most of the loss of revenue from its top travel account has been factored & we can expect steady revenue momentum in FY22. We continue to value Sonata on 15X FY23 earnings to arrive at changed TP of INR 503 (earlier: 427). Sonata is currently trading at 13x/12x on FY22/23 earnings of INR 30/33.5. Maintain Buy.