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Sonata posted a mixed operating performance – While IITS revenue was flat QoQ at USD82.4mn (0.6% CC), in line with our estimates, IITS EBITDAM increased by 70bps QoQ to 20.2%, above our expectations, driven by AI-led productivity, pyramid optimization, higher offshore mix, improved utilization, and forex movement, and partly offset by higher AI-led CSP bundled deal costs. Sonata recorded order bookings worth USD95mn (18% was AI-led) and bookto-bill of 1.16x. Sonata’s large-deal pipeline stood at 11 in Q4, lower than previous quarters’, largely due to deal conversion during Q4. However, the management indicated that overall pipeline momentum remains strong. Rajsekhar Datta Roy has been appointed as the CEO of SSOF wef 9-May-26, after spending nearly 3 decades in the company. The mgmt remains cautiously optimistic and expects gradual improvement in growth over the medium term. It expects IITS EBITDAM to be stable, while the domestic business is expected to return to the growth trajectory in FY27, with historical growth rates likely to be achieved over the next 1-2 quarters. We tweak our EPS estimates by ~1% for FY27/28, factoring in the Q4 performance. We retain BUY on SSOF and TP of Rs370 at 16x Mar-28E EPS

Results summary

IITS revenue was flat QoQ to USD82.4mn (0.6% CC), in line with our estimates. IITS EBITDAM rose by 70bps QoQ to 20.2%. IITS revenue was driven by TMT (+16.3% QoQ in USD terms), whereas BFSI was flattish. All other verticals saw a fall – Healthcare (-6.1%), RMD (-8.2%), and Emerging (-24.9%). Among geographies, Europe grew 15.1% QoQ while the US and RoW declined 2.6% and 14.2%, respectively. Overall EBITDAM increased by 170bps QoQ to 8.2%, above our estimate of 7.3%. Net profit stood at Rs1.3bn, ahead of our estimates of Rs1.2bn. However, reported profit included net exceptional loss of Rs316mn, comprising an impairment loss on receivables of Rs970mn, partly offset by a reversal of contingent consideration payable to Quant amounting to Rs654mn. IITS headcount fell 1.8% QoQ to 5,794. Gross contribution declined 1.1% QoQ to Rs753mn. Sonata declared a final dividend of Rs4.15/sh. What we like: Inline revenue, margin beat. What we do not like: Softness in healthcare, data, and emerging tech.

Earnings call KTAs

1) IITS revenue growth continues to be impacted by uncertain macros and slower decision-making.

2) In SITL, Sonata continues to execute its 3-pillar strategy:

a) driving growth in the Microsoft SMC segment

b) expanding AI-led partnerships with other ISVs

c) securing large SI deals.

3) The mgmt does not anticipate losing any further domestic customers to direct billing from OEM partner.

4) Softness in BFSI was largely driven by a decline in a large account. Recent deal-wins and client ramp-ups should support growth, though the mgmt remains cautious of any potential contraction in some large clients.

5) TMT is seeing increased traction, but sustainability remains a key monitorable.

6) Overall, growth is expected to be driven by BFSI, TMT, and HLS, with the RMD growth recovery plan in progress.

7) AI momentum continues to build, with AI-led deal pipeline of ~USD280mn and AI order book of USD16.9mn in Q4.

8) Capex increase in Q4 was due to the launch of a new facility in Chennai for a BFSI customer, largely a one-time activity.

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