The Hindu Business Line : Sonata Software: Hold

INVESTORS can consider retaining their exposures in the Sonata Software stock. As the stock has run up sharply in the past few months, it may be prudent to take fresh or additional exposures only at declines linked to broad markets. At the current market price, the stock trades at a price-earnings multiple of 19 times its annualised per share earnings for 2005-06 on a consolidated basis.

Though this is on the higher side for a mid-size company, the earnings momentum in the coming quarters is likely to sustain interest in the stock.

Some of the key engagements and partnerships Sonata has entered into — such as with Microsoft and TUI (UK's largest holiday company) — are likely to build predictability and scale in its performance from international operations.

The step-up of infrastructure in Hyderabad and Bangalore in recent months and greater offshore contribution also reflect positive moves in that direction.

On the flip side, however, client concentration, wage inflation and appreciation of the rupee remain concerns that may affect revenue growth or margins in the near future. Sonata derived 40 per cent of its consolidated revenues of Rs 85.5 crore in the quarter-ended June 2005 from international operations through exports. The balance came from sale of products and services in the domestic market.

This segment distributes and implements packaged software from Microsoft, Oracle, IBM, among others. Both on a standalone and consolidated basis, the performance of Sonata has been encouraging.

The focus has primarily been on the contribution of international operations, in terms of revenue and margin growth.

On the domestic front, while the revenue growth has been encouraging, margins in the products/solutions business have remained under 2 per cent.

In international operations, the contribution of the top five customers has gone up sharply to 65 per cent in the first quarter of FY06, from 54 per cent in the year-ago period.

For a mid-size company, this sharp focus on, and contribution by, a few clients lends confidence in the business model.

At the same time, client concentration remains a significant risk for companies of this size. In the past, the revenue contribution was skewed in favour of Europe.

But, in recent times, the contributions from Europe and the US are gradually getting balanced, leaving enough scope to exploit opportunities from both. The receivable days have also been improving steadily, in line with the overall fundamentals.

Aided by an improvement in operating margins of international operations, the overall margins of Sonata may rise in the coming quarters.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page