Sonata Software surges 26% in one month; stock nears record high

The new CEO has reiterated that he is planning to double IT services revenue in four years as he is looking to accelerate the growth from hereon

Shares of Sonata Software continued at their northward movement, hitting a fresh 52-week high of Rs 739, as they rallied 9 per cent on the BSE in Monday's intra-day trade amid heavy volumes. The stock of the information technology (IT) company surpassed its previous high of Rs 689.95, touched on February 16. It was quoting close to its record high level of Rs 773, hit on October 20, 2021.

In the past one month, Sonata Software has outperformed the market by surging 26 per cent after the company reported a strong financial performance for the quarter ended December 2022(Q3FY23). In comparison, the S&P BSE Sensex rose 1 per cent during the period. The average trading volumes on the counter jumped over three-fold today with a combined 1.2 million equity shares having changed hands on the NSE and BSE till 11:08 am.

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).

For 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. The new CEO reiterated that he is planning to double IT services revenue in four years as he is looking to accelerate the growth from hereon. He also mentioned that he continues to focus on large deals which along with enhancing presence in BFSI & Healthcare verticals would be building blocks to reach the growth target.

Post Q3 results, analysts at ICICI Securities have changed their rating on Sonata from ‘hold’ to ‘buy’. The stock however, is trading above their target price of Rs 725 per share.

The brokerage firm said the new CEO announced a plan to double IT services revenue in four years, to be aided by large deal momentum and tuck in acquisition. The strong digital capabilities helping it to accelerate digital revenue growth enhancing digital revenue mix. i.e. 73 per cent of mix now vs. 68 per cent a year ago. Upgrades in Microsoft Dynamics and tapping Fortune 1000 clients in the medium to large category bode well for revenue growth. Robust hiring trend, winning large deals and inorganic growth prompt us to build IT service dollar revenue growth of over 16.7 per cent CAGR over FY22-25E are key triggers for future price performance, analysts said.