Buy Sonata Software; target of Rs 195: Centrum

Centrum's research report on Sonata Software

Sonata Software’s results were a mixed bag. IT services business delivered a strong traction on USD revenues as well as delivered EBIDTA margins. However, consolidated revenues missed our estimates owing to softness in products business. While consolidated EBIDTA was inline with our estimates, PAT missed our estimates by 6% owing to lower other income and higher tax rate. We model Sonata Software’s IT services business to deliver 15% USD revenue growth for FY17 (vs 14% modelled earlier). Of this, organic growth would be 10% and rest owing to full impact of IBIS consolidation. Our EPS estimates remain intact as revenue downgrade led by lower products business revenues is negated by consolidated EBIDTA margin upgrade. We raise our TP by 5% to Rs195/sh (12x FY18E EPS vs 11.5x earlier). Maintain BUY.

Sonata Software performance appears commendable considering the challenges being faced by the larger vendors in the sector. We believe that Sonata Software’s organic growth of 10% for FY17 would at the upper end of peers in the sector. Sonata’s competency in IP led offerings and Digital (accounts to 31% of total revenues) is also aiding growth momentum. We model IT services USD revenue growth assumption at 15%/13.3% for FY17/18E (vs 13.9%/12.8% modelled earlier). Net cash on balance sheet stands at Rs1320mn (Rs12/sh, which is 8.5% of Mcap). Moderate valuations (10.1x FY18E EPS), strong dividend yield (4.8% at CMP) and steady growth in IT services business lead to favourable risk return. Retain BUY.