Buy Sonata Software Ltd For Target Rs.835 - ICICI Direct
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Aiming to reach, half a billion-dollar IT services revenues by FY26/27, acquires Quant systems
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%)
Key Highlights:
* years based on certain milestones.
* The acquisition is in line with Sonata’a strategy to accelerate IT services growth from hereon as well as strengthening its offering in BFSI and Healthcare vertical
* Quant Systems’s revenue grew 4x in last 2 years and growth going forward is also expected to be strong. EBITDA margins for the company are also healthy i.e., upwards of 30%.
What should investors do? Sonata’s share price has grown by ~3x over the past five years (from ~| 238 in February 2018 to ~| 706 levels in February 2023).
* We maintain our BUY rating on the stock
Target Price and Valuation: We value Sonata at | 835 i.e., 18x P/E on FY25E EPS.
Key triggers for future price performance:
* Acquisition of QS will strengthen Sonata offering in BFSI and Healthcare & Life science verticals which will aid the revenue growth of company
* It will also help in commanding better pricing as Quant Systems led data analytics, data engineering is already commanding premium billing rates
* Winning large deals and strong digital spending by the clients prompt us to build IT service dollar revenue growth of over 23.8% CAGR over FY22-25E
Alternate Stock Idea: Apart from Sonata, in our IT coverage we also like Infosys
* Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive
* BUY with a target price of | 1,730
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