Prabhudas Lilladher has given Hold recommendation for Sonata Software with a target price of Rs. 704 in its research report issued on Jul 26, 2022

Prabhudas Lilladher’s research report on Sonata Software

We downgrade Sonata to HOLD (earlier Accumulate) as we believe revenue growth will continue to be modest in IITS going forward – 1) as it is likely to take 2-3 quarters to overcome supply side constraints and 2) potential impact of weak macro environment. Margins in IITS business are also expected to remain under pressure due to investments in 1) freshers, 2) sales teams, 3) development centres in Canada, Ireland, Mexico and 4) leadership team. Sonata reported IITS revenue of USD 56.8 mn, 3.9% QoQ CC, 2% QoQ USD (Ple: 2.8%). Growth this quarter was impacted by supply side constraints, project specific delays and cross-currency headwinds. Net-headcount in IITS business grew just 1% QoQ. Sonata plans to on-board 600 freshers over Q2 and Q3. Growth in DPS business continued to be strong at 42% YoY (in INR terms). Sonata continues to focus on growing cloud services revenue across three major cloud providers in domestic market.


Our revenue estimate increase by 8.5%/1.5% in FY23/24 led by increase in DPS revenue and expected benefit from INR depreciation. We value Sonata 15x (unchanged) on FY24 EPS to arrive at changed TP of INR 704 (earlier: 694). The company is currently trading at 18x/16x on FY23/24 earnings of INR 41/47 with Revenue/EPS CAGR of 13.5%/13.8% over FY22-24E.

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