Buy Sonata Software; target of Rs 775: HDFC Securities

HDFC Securities' research report on Sonata Software

Sonata Software announced its largest acquisition of Quant Systems, which involves a cash payout of USD 65mn and an earn-out of USD 95mn payable over the next two years. The deal is valued at P/S of 4.3x (1.8x excluding earnout), which we believe is on the higher side but it is justified by Quant’s (1) high growth profile (3Y organic CAGR of 113%); (2) superior margin of >25%; (3) excellent partnership network (Salesforce, AWS, Adobe, Snowflakes, etc.); and (4) domain capabilities in the BFSI and healthcare verticals. The acquisition is in line with management’s target to double IITS revenue (hit half a billion) in four years (organic CAGR of ~15%), supported by higher investments in new verticals and geographies and expanding partnerships beyond Microsoft. The acquisition will also add two new clients to the top-5 list of Sonata’s and will help expand its presence in the BFSI and healthcare verticals. We like Sonata based on (1) growth acceleration in IITS; (2) strong Microsoft relationship; (3) new CEO focus on improving sales engine; (4) continued growth in DPS; and (5) high RoE of >35%. The deal is EPS accretive and will boost FY24/25E EPS by +2/6% respectively.

Outlook

We maintain our BUY rating and increase our TP to INR 775, based on 18x Dec-24E EPS.