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IT services growth impressive…

About the stock: Sonata Software (Sonata) offers IT services (30%) and product licensing & deployment (70%).

* The company provides IT services to travel, retail, agri & commodities and manufacturing and software vendors

* Net debt free and healthy double digit return ratio (with RoCE of >30%)

Q3FY22 Results: Sonata reported strong numbers in IT services while product business margins were weak.

* IT services dollar revenues increased 9.5% QoQ to US$53.5 million

* EBITDA margin for IT services were down 70 bps QoQ due to increase in employee costs

* The company is looking to increase fresher hiring by 40% in FY23

What should investors do? Sonata’s share price has grown by ~5x over the past five years (from ~| 174 in January 2017 to ~| 875 levels in January 2022).

* We maintain BUY rating on the stock

Target Price and Valuation: We value Sonata at | 1,050 i.e. 21x P/E on FY24E EPS

Key triggers for future price performance:

* With improved traction in retail, commodity & manufacturing and healthy demand for its travel client, we expect FY24E to witness robust growth in revenues

* Upgrades in Microsoft Dynamics and tapping 1000 clients in the medium to large category bode well for revenue growth

* Robust hiring trend & inorganic growth prompt us to build IT service dollar revenue growth of 21.7% CAGR over FY21-24E

Alternate Stock Idea: Apart from Sonata, in our IT coverage we also like Infosys.

* Strong revenue guidance prompts us to be positive on the stock

* BUY with a target price of | 2,300

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