Buy This Midcap IT Stock For An Upside Of 25%

Sonata Software reported numbers that were strong from IT Services, while the margins were resilient. Broking firm, Anand Rathi has placed a buy call on the stock for long term investors.

Strong quarterly numbers

Sonata delivered $53.4m IT Services Q3 revenue, up 5.5% q/q (organic est.), 21% y/y, accelerating from Q2.

Current market price	Target price	Gains %
Rs 837	Rs 1050	25%

"Net hiring was 175, utilisation went up to 90% on supply crunch. Q3 Services revenue was driven by demand in the CPG/Retail and OPD/ISV verticals, Sonata's strongholds. The Domestic business ($198m, up 32% y/y) continues to shine. IT Services margins were flattish q/q, adj. for forex, and after absorbing Q3 wage rises. We, however, trim FY22e/23e profit 5%/4%, easing expectations of margin expansion and slower recovery in Travel. We revise our target to Rs. 1,050 (from Rs.1,070), 21 times FY24 EPS," Anand Rathi has said in a report.

Strong Q3 for IT services

IT Services was strong in Q3 and the full three-month Encore integration further boosted it to 8% q/q, 30% y/y. Growth was driven by CPG/Retail (up 11% q/q) and OPD/ISV (up 8% q/q) while Travel grew 5% q/q. Management expects Q4 to be flattish for Travel and growth resuming in Q1 FY23. The top-5 and -10 clients continued to grow (both up 6% q/q, 30%+ y/y). Headcount was up 26% (~19% organic); net hiring was a strong 175. Utilisation upped 1% q/q to 90% while offshore was a steady 69%, flat q/q, up 400bps y/y. Overall, company level growth is likely to hold at 4-5% q/q.

Target revised to Rs 1050, retaining a Buy on the stock

Anand Rathi has placed a buy call on the stock with a price target of Rs 1050.

"Sonata's IT business is likely to clock a 17% (organic) CAGR over FY22-FY24 and may see segment margins of 25.6% by FY24 (FY22e 26.4%) on global delivery build out and higher wage hikes. On the domestic front, it is likely to record a 21% CAGR, taking the consolidated FY24e EPS to Rs 50. The stock trades at 17 times FY24e EPS (5.3% FCF yield), which we find attractive. Risk: Supply-side disruptions in the next few quarters," the brokerage has said.

Disclaimer

Investing in equities is risky and investors must therefore understand the risk. The author and Greynium Information Technologies Pvt Ltd would not be responsible for any losses caused based on the article. The author and is family do not hold shares in the above mentioned company.