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IT services revenues to improve in coming quarters…

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, manufacturing and software vendors

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

Q1FY22 Results: Sonata reported Q1FY22 results.

* IT services dollar revenues increased 1.5% QoQ to US$44.5 million

* Overall EBITDA margin declined 162 bps QoQ to 8.0%

* Overall PAT increased 4% QoQ to | 86.7 crore led by higher other income.

What should investors do?

Sonata’s share price has grown by ~5x over the past five years (from ~| 150 in August 2016 to ~| 813 levels in August 2021).

* However, we downgrade the stock from BUY to HOLD

Target Price and Valuation: We value Sonata at | 915 i.e. 21x P/E on FY23E EPS.

Key triggers for future price performance:

* Improved traction in retail, commodity & manufacturing and healthy demand for its travel client. We expect FY22E to witness robust growth in revenues

* Upgrades in Microsoft Dynamics and taking 1000 clients from the medium to large category bodes well for revenue growth

* Robust hiring trend and inorganic growth prompt us to build IT service dollar revenue growth of 23.4% CAGR over FY21-23E

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

* Growth in new logo acquisition, increasing deal size, expansion of sales & marketing and market share gains to drive revenues

* BUY with a target price of | 2,900

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