KR Choksey has given Buy recommendation for Sonata Software with a target price of Rs. 1087 in its research report issued on Jan 18, 2022

KR Choksey’s research report on Sonata Software

Sonata Software Ltd (SSOF) Q3FY22 performance was higher than our estimate. Dollar Revenue was up materially by 9% QoQ to USD 53.4Mn (KRChoksey est. USD 52Mn). Rupee revenue grew by ~33% YoY to INR 18,580Mn (KRChoksey est. INR 17,136Mn). Reported operating margin stood at to 6.4% and reported net profit grew by 7.1% QoQ to INR 977Mn (KRChoksey est. INR 994Mn) with margin of 5.3%. In Q3FY22, domestic business performed well, up 33% YoY basis. International IT services witnessed a strong growth momentum (+31% YoY) backed by strong execution in platform, IP and alliance led businesses. Growth was broad based across the US (+11% QoQ), Europe(+2.5% QoQ) and RoW (+2.3% QoQ), mainly driven by ISV (+31.4%), Retail Essential (+9%), Distribution & Manufacturing (+20%) and Travel (+9.4%). The deal pipeline continues to be healthy and strong through multiple new digital wins from existing and new customers. Our target price of INR 1,087 is based on 26x Mar-24E EPS with EPS CAGR of 17.5% over FY22-24E.

Outlook

Sonata Software is currently trading at a valuation with a P/E multiple of 23.3x/20.6x on FY23E/FY24E earnings. We expect strong deal momentum across geographies, higher focus on ISV and Retail (Essential/Non-Essential), and tailwind in Managed Cloud Services will aid growth over the medium to long term in future and hence we are assigning a P/E multiple of 26x to the FY24 estimated EPS of INR 41.8 to arrive at a target price of INR 1,087 per share, an upside of 26% over the CMP. Accordingly, we upgrade our rating to an “BUY” from “ACCUMULATE” to the stock.

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