INSUBCONTINENT EXCLUSIVE:
Reliance Securities has a buy call on Sonata Software with a target price of Rs 420.
The current market price of Sonata Software is Rs
332.50.
Time period given by the brokerage is one year when Sonata Software price can reach the defined target
Investment rationale by the brokerage-IP-Led revenue: IP-led revenue has been the critical driver for winning new clients and scaling
business from existing clients
IP-led revenue commands better pricing, and is a key margin lever and driver of non-linear growth
Sonata earns nearly $2mn annualised revenue from pure IP
The company is focussing on building on IP revenue with key services including Microsoft Dynamics, e-Commerce (SAP Hybris) and digital
IP-led revenue has clocked 8.9 per cent CQGR over the past 8 quarteRs (>40 per cent annualised) vs
3.8 per cent total IITS revenue CQGR (16 per cent annualised)
enable the company to align closely with its clients and drive revenue predictability
The company recently held a meeting with a major client over 2 days, engaging with 5 members of the C-suite
Sonata is focussing on driving revenue scale-up with major clients
Currently, 7-8 clients contribute >$5mn, while >20 clients contribute >$1mn
Sonata targets 60 clients with average engagement size of $5mn over 4-5 years
Given that it is a mid-sized IT firm with high client and vertical concentration, we note certain inherent risks that could derail such
aspirations.
Inorganic growth to aid 4q revenue; margin may slip: On 4QFY19 outlook, management believes organic IITS revenue growth is
4Q is likely to see a major inorganic growth component, given that Scalable Data Solutions (SDS) will be consolidated fully, while Sopris
revenue (4.3 per cent), in addition to organic growth
However, IITS margin could see some moderation given investments to be made in the business, apart from a minor wage hike impact
Thus, 4Q is likely to see healthy IITS revenue growth (aided partly by acquisitions) along with lower margin.
Outlook valuation: We like
IP business will remain the key differentiator for Sonata, which will drive IP-led revenue and boosting pricing power
We expect the Microsoft alliance to be the key growth driver, going forward
Sonata has already carried out 2 acquisitions recently through internal accruals
We maintain our BUY recommendation on the stock with a target price of Rs 420.
