Chola Wealth Direct Assign Buy On This Multibagger IT Sector Stock, Claims Strong 40% Upside

Stock outlook & Returns on investment

On NSE, the stock of Sonata Software last traded at Rs 575.30 apiece, 0.35% down from its previous close. The 52-week high of the stock is Rs 694.52 apiece and the 52-week low is Rs 457.59 apiece, respectively.
It has given a 1.04% positive return in a week, and 1.7% negative return in a month, respectively. It gave a 14.99% positive return in the past 3 months. However, in the past 1 year, it fell 11.8%. In 3 years, it gave 145.19% multibagger return and in the past 5 years, it gave 185.9% multibagger return.

Fundamental Rationale

• Indo Digital transformation was already an important strategic objective before the Covid-19 pandemic. However, the sudden outbreak of the pandemic has acted as a catalyst to accelerate the transformation journey for most of the organizations. The winning formula for the IT industry was a mix of digital and innovation with platforms and XaaS playing a key role in accelerating tech adoption. To address margin pressures, the industry increased its focus on operational efficiency. Among other sectors, eCommerce gained a deeper penetration of the O+O model (Offline + Online).
• The company remains optimistic about the Microsoft opportunity (product engineering + dynamics) and is confident of delivering ~15-20% growth. 
• Sonata management has decided to scale up the BFSI and healthcare life sciences verticals through continuous investment.
• The management has a target of doubling its IITS revenue in the next four years. The focus is to pivot to large annuity-based managed services contracts; the recent two large deal wins (USD 10mn+) indicate improved sales rigor and these will start contributing from Q4FY23E.
• The IITS EBITDA margin expanded 108bps QoQ to 23.5% (vs estimate of 72bps decline), led by higher offshoring (+100 bps QoQ) and stable utilization.
• The attrition has started moderating and the freshers hiring program is on track (~600 in FY23E).
• The next wage hike and sales investments will come in Q4, the target margin range for IITS is 22-23%.
• DPS growth was strong (+72% YoY), supported by growth in cloud licenses and annuity revenue.

Valuation

Sonata Software is currently trading at a valuation with a P/E multiple of ~20.0x/~15.5x 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.

Technical Rationale

Sonata Software Ltd. is in a long term uptrend and medium term down trend. In short term stock was formed an ascending triangle pattern with higher bottom and a triple top around 600 levels. "We expect stock will breach its resistance at 600 and start a shot term uptrend towards 800 levels. In this view, we recommend to buy this stock at current levels (580) with stop loss at 480 and a target of 770 - 800. Long term support is at 450 and resistance is at 770," the brokerage has said.

About the company

Sonata Software is an information technology services company that provides business intelligences and analytics, application development management (ADM), mobility, cloud, social media, testing, enterprises services (ERP and CRM) and infrastructure management services. Its portfolio consists of 30% of IT services and 70% of product licenscing & deployment. It provides IT services to travel, retail, agri and commodities and manufacturing and software vendors.

Disclaimer

The stock has been picked from the brokerage report of Chola Wealth Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.