Broker's call: Sonata Software (Buy)

CMP: ₹198.4

Target: ₹230

Sonata Software’s great dependence on Travel (23 per cent of revenue, down 13 per cent q/q) and on Europe (30 per cent , down 5 per cent q/q) are prime concerns in the current context. However, one of its top travel clients is likely to resume operations, at least partly, from mid-Jun, while the UK has issued some guidelines for resuming international traffic (exact dates awaited). On this backdrop, OPD and other IT services are likely to be resilient given Sonata’s great dependence on MS tech (about 70 per cent of IT services revenue). We estimate an 8 per cent decline in IT services in FY21, 7 per cent growth in FY22.

We are retaining our ‘Buy’ based on the strong execution track record, expectations of some revival in travel-related expenditure in H2, and capital allocation discipline. On the negatives, client concentration is still high (top-10: 64 per cent of revenue).

Overall, we think the risk-reward is favourable at current valuations (8.7x FY22e EPS, 11 per cent FY22e FCF yield, NIIT Tech trading at 15.6x FY22e EPS and 27 per cent travel exposure).

Risks: Client concentration, Travel vertical exposure.