Sonata Software hits new high; stock up 44% since start of the year

Acquisition of Quant Systems will strengthen Sonata offering in BFSI and Healthcare & Life science verticals which will aid the revenue growth of company, say analyst at ICICI Securities.

Shares of Sonata Software hit a new high of Rs 809 as they rallied 5 per cent on the BSE in Thursday’s intra-day trade on strong dollar revenue growth outlook.

Thus far in the calendar year, the stock of information technology (IT) has zoomed 44 per cent, as compared to 3.4 per cent decline in the S&P BSE Sensex. At 09:52 AM; it quoted 3 per cent higher at Rs 796.40, as against 0.56 per cent fall in the benchmark index.

In past one month, stock price of Sonata Software has soared 27 per cent, after the company reported a strong financial performance for the quarter ended December 2022(Q3FY23). Sonata's IT services dollar revenues grew 4.7 per cent quarter-on-quarter (QoQ) and 3.9 per cent in constant currency (CC) terms, while rupee revenue came in at Rs 489.6 crore, up 6.3 per cent QoQ and 23.9 per cent year-on-year (YoY).

Ebitda (earnings before interest, taxes, depreciation, and amortization) margins in IT services declined 70 bps QoQ to 25.2 per cent due to elevated employee cost and increased marketing spend in Q3. The company's consolidated profit after tax jumped 20 per cent YoY and 4 per cent QoQ at Rs 117.60 crore.

The company indicated that it won four large deals from cloud transformation, and customer experience modernisation, and also mentioned that none of these deals falls under vendor consolidation theme

Sonata offers IT services (30 per cent) and product licensing & deployment (70 per cent). The company provides IT services to travel, retail, agri & commodities and manufacturing and software vendors. The company is net debt free and has healthy double digit return ratio (with RoCE of over 30 per cent).

On February 22, Sonata’s wholly-owned US subsidiary signed a definitive agreement to acquire 100 per cent stake in US-based Quant Systems (QS) for total consideration of $160 million (4.3x sales), $65 million to be paid upfront while rest $95 million to be paid in next 2 years based on certain milestones.

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 per cent.

Analysts at ICICI Securities have ‘Buy’ rating on Sonata Software with a target price of Rs 835 per share. 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 per cent CAGR over FY22-25E, the brokerage firm said in stock update.