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HDFC Securities
Sonata Software (Buy)
CMP: ₹356.9
Target: ₹375
Sonata Software delivered a decent quarter with slight miss on revenue but margin beat was a positive surprise. International IT services (IITS) revenue was up 1.1 per cent q-o-q (+3.0 per cent CC) to $37.8 million, below our estimate of $38.5 million. IITS margin jumped to 22.2 per cent (versus our estimate of 20 per cent) due to higher IP-led revenue (+5.6 per cent q-o-q and 82 per cent of incremental revenue). The company is witnessing increased traction on the Microsoft Dynamic AX (Cloud ERP platform) and is a preferred ISV development centre partner for Microsoft. Focus on IPs and Platforms is driving Digital revenue (33 per cent of rev, +1.1/23.1 per cent q-o-q/YoY).
Total revenue stood at ₹688 crore, up 10.0 per cent q-o-q, led by rise in Domestic Product & Services’ (DPS) revenue (₹437 crore, +12.5 per cent q-o-q).
We like Sonata IP-focussed business model, capability to scale up top-accounts, quality balance sheet (net cash of ₹50/share, about 15 per cent of market-cap), high RoE (about 31 per cent) and high dividend yield (about 3.2 per cent).
Maintain ‘buy’ with a target price of ₹375 based on 16x FY20 EPS.
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