Buy Sonata Software; target of Rs 380: HDFC Securities

HDFC Securities' research report on Sonata Software

Sonata� delivered� soft� 4QFY18� with� slight miss on both revenue and IITS margin.� International� IT� services� (IITS)� revenue� was� flat QoQ at USD 37.4mn,� below� our� estimate� of� USD� 38.9mn. Adjusting for one-time pass through� revenue� last� quarter,� QoQ IITS rev growth was 2.7%. IITS margin slipped� to� 19.8%� (vs.� our� est.� of� 21.0%)� despite higher off-shoring (+400bps QoQ). Travel (27% of rev, -3.6% QoQ) and Retail (25% of rev, -7.4% QoQ)� were under pressure while OPD (28% of rev) was flat QoQ. Focus on IPs and� Platforms� is driving Digital revenue (33% of rev, +3.1% QoQ, +23% YoY for FY18). Total revenue stood at Rs 6.26bn, down 18.4% QoQ, led by drop in Domestic Product & Services�� (DPS) rev (Rs 3.89bn, -26.7% QoQ).

Outlook

We expect IITS�� USD revenue to grow 14/15% with margin of 20/21% in FY19/20E. We like Sonata IP-focussed business model, capability to scale up� top-accounts,� quality� balance sheet (net cash of Rs 48/share, ~13% of Mcap), high RoE (~31%) and high dividend yield (~3.1%). Maintain BUY with a TP of Rs 380 based on 16x FY20 EPS.

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Read More First Published on May 31, 2018 04:27 pm