Hold Sonata Software Ltd For Target Rs.770 - ICICI Direct
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Margins may see downward trajectory
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%)
Q1FY23 Results: Sonata reported Q2FY23 numbers.
* IT services dollar revenues increased 2% QoQ , 3.9% in CC
* EBITDA margins in IT services declined 90 bps QoQ
* The company announced bonus shares in the 1:3 ratio
What should investors do? Sonata’s share price has grown by ~5.4x over the past five years (from ~| 163 in July 2017 to ~| 700 levels in July 2022).
* We revised rating to HOLD from BUY on the stock
Target Price and Valuation: We value Sonata at | 770 i.e. 17x P/E on FY24E EPS.
Key triggers for future price performance:
* Strong digital capabilities helping it for accelerated digital revenue growth enhancing digital revenue mix. i.e 73% of mix now vs 68% a year ago
* Upgrades in Microsoft Dynamics and tapping fortune 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 over 18.5% CAGR over FY22-24E
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 | 1,760
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