This Multibagger IT Co.'s India Business Delivered High growth, Brokerage Suggests Buy For 23% Gains

Anand Rathi in its report on Sonata Software Limited has given a buy call to the stocks of the company for a target price of Rs 880/share. Sonata's IT services revenue was $57m (TTM $215m), up 2% q/q (4% cc), 19% y/y organic (28% reported). Headcount (up 23% y/y) addition was just 36 as ~600 freshers will join in Q2/Q3.

The margin was 22.4%, down 63bps q/q absorbing management costs, wage hikes and cross-currency. The margin outlook was more positive due to growth and rupee depreciation, and despite sales hiring ahead. The India business delivered high growth.

Considering the estimated target price of Rs 880 per share by Anand Rathi and the stock's current share price, it has a huge potential of 23% upside in 12 months.

Stock Outlook & Returns

Sonata Software stock today closed at Rs 715.35/share after gaining 1.43% from the previous close on Friday of Rs 705.25/share. Today it was opened at Rs 709/share. The shares of the company hit the 52-week low at Rs 610.10/share on 20th June 2022, and a 52-week high at Rs 1024.90/share on 2oth October 2021, respectively.

The shares of the company in the past 1 week have fallen 4.22%. However, it has gained 8% in the past 1 month. Over the last 1 year, the shares have fallen 7.39%. In the past 3 and 5 years, it has delivered a multibagger return of 129.57% and 325.93%, respectively.

Its ROE is 34.24%. The PE ratio is 18.92%. PB ratio is 6.86%. TTM EPS is Rs 37.80. The dividend yield is 2.94% and the face value is Rs 1. It is a small cap IT Stock with a market capitalization of Rs 7,522.57 crore.

IT services growth driven by Hi-tech, Healthcare

Hi-Tech/ISV contribute 33.2% to IT services and is seeing growth acceleration in the last two quarters. In Q1 FY23, it delivered 4% q/q growth. Besides, Healthcare (4% of IT services), though on a small base, grew 10% q/q. Retail also grew but at the company average with management not anticipating weakness in this vertical now. Travel declined 1% q/q mostly on European currency billing. US sequential growth was slow compared to peers; new leadership hired for acceleration.

IT services margins at upper end of 20-22% guidance

IT services' Q1 EBITDA margin was 22.4%, (down 63bps q/q, but y/y up 113bps), absorbing the impact of the balance wage hikes and other sales/management-related costs. The wage hikes are scheduled in Q4 and attrition has already started coming off the peak. Management spoke about more senior management and sales hiring ahead but, given the tailwinds, should stay on course in terms of margin trajectories. Hence, we retain our margin estimates. Utilisation to be a little lower ahead as freshers join over the next two quarters.

 

Target revised to Rs880; retaining a Buy

Sonata's IT business is likely to clock a 17% CAGR, with margins expected to contract to ~21.3% (FY22 23.4%, Q1 22.4%), both largely unchanged. In its India business, Sonata is likely to record a 21% EBITDA CAGR, taking the consolidated FY24e EPS to Rs49. The stock trades at 14x FY24e EPS (6% FCF yield), which we find attractive. According to the brokerage the key risk is Supply-side challenges.

Disclaimer

The stock has been picked from the brokerage report of Anand Rathi. 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 check with certified experts before taking any investment decision.