Broker's call: Sonata Software (Buy)

CMP: ₹345.65

Target: ₹415

Sonata Software delivered a steady performance for Q4FY19 with in-line IT services revenues and margins. PAT was 8 per cent ahead of our estimates aided by higher other income. Sonata’s IT services dollar-term revenues grew by 12 per cent for FY19 (11 per cent organic growth). We build 18 per cent dollar-term revenue growth for FY20 (organic growth is 12 per cent and rest is owing to full impact of Scalable Data Systems and Sopris acquisitions). Both these acquisitions are being consolidated effective 4QFY19 and hence will have the full impact on revenues for FY20.

Sonata Software’s focus on “Platformation” initiatives within its focus verticals (retail, CPG and travel) appear to be yielding results. Sonata has been able to deliver strong margin performance owing to its Platforms and IP-led offerings (Selling Services along with IP). IT services adjusted EBIDTA margin stood at 23.6 per cent for FY19 which is highest among midsized peers. We retain our EPS estimates for FY20/FY21E.

Retain target price at ₹415 (13.5x FY21E EPS). Dividend for FY19 stands at Rs12.75/sh which translates to strong dividend yield of 3.6 per cent. Retain ‘buy’.