Hold Sonata Software Ltd For Target Rs.520 - ICICI Direct
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IT services numbers weak
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%)
Q2FY23 Results: Sonata reported weak Q2FY23 numbers.
* IT services dollar revenues increased 1.8% QoQ & 3.9% in CC terms
* EBITDA margins in IT services declined 70 bps QoQ
* The company closed two large deals in Q2
What should investors do: Sonata’s share price has grown by ~4.4x over the past five years (from ~| 116 in October 2017 to ~| 505 levels in October 2022).
* We maintain our HOLD rating on the stock
Target Price and Valuation: We value Sonata at | 520 i.e. 16x P/E on FY25E EPS.
Key triggers for future price performance:
* Strong digital capabilities helping it in 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 and inorganic growth prompt us to build IT service dollar revenue growth of over 13.3% 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 | 1,670
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