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Sonata Software- Healthy long term growth outlook

ICICIdirect Research 30 Aug 2024 DISCLAIMER

Sonata Software (Sonata) provides IT services and product licensing services to its clients in BFSI, HLS (Healthcare & Lifesciences), RMD (Retail, Manufacturing, Travel & Distribution & TMT) segments

Growth Outlook: Sonata Software expects stronger growth in Q2, with momentum accelerating from the second half of FY25. The company is confident in achieving their $1.5bn target by FY27, albeit delayed by 2-4 quarters. The IITS (IT services) pipeline is healthy, supported by 3 large deals won across Healthcare, Manufacturing, and BFSI. Long-term growth is driven by AI, large deal traction & key client contributions. We expect IT services to grow at a 12.8% CAGR over FY24-26E in dollar terms with ~8.9% growth in FY25

Deal Momentum & Margins: The company won 3 large deals in Q1FY25 and is pursuing 49 more. Management anticipates that 20% of revenue will come from AI services within the next three years. While Sonata faces short term margin pressures due to delays and wage hikes, margins are expected to recover by FY26 to the normalised mid-20s levels vs. low 20s likely in FY25.

Our view: Long-term growth is driven by AI, large deal traction & key client contributions. Overall, the long-term growth outlook remains positive, driven by advancements in AI, a strong pipeline, and continued large deal wins, despite the near-term margin challenges. We have a BUY rating, valuing it at a target price of ₹ 770, with a multiple of 28x P/E on FY26E EPS.

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