Hold Sonata Software; target of Rs 205: ICICI Direct

ICICI Direct's research report on Sonata Software

Sonata Software reported poor Q4FY20 results. IT service revenues in dollar terms fell 5.1% QoQ mainly due to Covid-19 pandemic and its exposure to impacted vertical like travel (down 12.7% QoQ, accounts for 23% of revenues) & retail (down 5.1% QoQ, accounts for 28% of revenues). IT service EBITDA margin also declined ~560 bps QoQ while PAT declined 22% QoQ. Overall revenues declined 25% QoQ mainly led by 33% decline in domestic product business. Overall PAT declined 19% QoQ to Rs 61.8 crore, mainly led by 22% QoQ decline in IT service revenues and one-time provision of IL&FS of Rs 12.7 crore. The DSO also increased by five days to 50 days led by an increase in DSO days in IT service and domestic segment.

Outlook

The company reported a subdued Q4FY20 performance. Further, considering its exposure to troubled verticals, we expect FY21E revenues, margins to remain under pressure. Although we expect Sonata’s partnership with Microsoft, exposure to Outsourced Product Development (26% of revenues) could boost revenue and margin, we remain cautious on company’s recovery in travel and retail vertical. Hence, we have lowered our eps estimates for FY21E and FY22E, prompting us downgrade the stock from BUY to HOLD with a revised target price of Rs 205/share.