Sonata Soft­ware Ltd

Money Times - - Stock Watch -

(BSE Code: 532221) (CMP: Rs.317.25) (FV: Re.1) (TGT: Rs.375+)

In­cor­po­rated in 1994, Ben­galuru based Sonata Soft­ware Ltd (SSL) to­gether with its sub­sidiaries pro­vides in­for­ma­tion tech­nol­ogy ser­vices and so­lu­tions in In­dia, USA, Europe and the Mid­dle East. Its ser­vices in­clude soft­ware de­vel­op­ment, tech­ni­cal and prod­uct mar­ket­ing ser­vices as well as con­sult­ing ser­vices. It of­fers so­lu­tions for travel, re­tail, dis­tri­bu­tion and soft­ware prod­uct com­pa­nies as well as for in­de­pen­dent soft­ware ven­dors (ISVs) through IP based plat­forms, prod­ucts and ser­vices that in­te­grate new dig­i­tal plat­forms such as Re­zopia, Brick and Click Re­tail, Travel and Modern Dis­tri­bu­tion. It pro­vides dig­i­tal en­gage­ment, ap­pli­ca­tion life­cy­cle and tech­nol­ogy in­fra­struc­ture ser­vices. It also re­sells prod­uct li­censes of soft­ware com­pa­nies. It has strate­gic al­liances with Mi­crosoft, Or­a­cle, SAP/Hy­bris, HP and IBM. SSL is fo­cused on its ‘Plat­for­ma­tion’ strat­egy with an aim to be­come a strate­gic part­ner for its clients. It seeks to use plat­forms and IP as busi­ness trans­for­ma­tion driv­ers with a view to bring all ser­vices un­der the ‘Plat­for­ma­tion’ strat­egy and be­come a long-term part­ner rather than just an IT ven­dor. This will drive cus­tomer stick­i­ness. Busi­ness­wise, some clients will work with SSL through plat­forms/IP and some un­der the broader ‘Plat­for­ma­tion’ strat­egy, which es­sen­tially im­plies dig­i­tal trans­for­ma­tion of the busi­ness. This will en­able SSL to align closely with its clients and drive rev­enue pre­dictabil­ity go­ing for­ward.

SSL has held a cou­ple of ‘Plat­for­ma­tion work­shops’ with prospec­tive clients in Europe to mar­ket this con­cept while pitch­ing for large deals. This strat­egy is wit­ness­ing good traction so far and we ex­pect it to yield the de­sired ob­jec­tives over the next few quar­ters.

Aided by Plat­for­ma­tion, SSL is look­ing to scale its client en­gage­ment size sub­stan­tially. Cur­rently, it counts 7 clients that give an­nual rev­enue of over

$5 mil­lion while 22 clients give over $1 mil­lion in an­nual rev­enue. The man­age­ment is tar­get­ing 60 clients with an av­er­age en­gage­ment size of $5 mil­lion over the next 4-5 years, which will drive

$300 mil­lion in an­nual rev­enue (15-20% CAGR).

With re­spect to Q2FY19 out­look, the man­age­ment ex­pects rev­enue growth to at least match 3% CC (con­stant cur­rency) growth seen in Q1FY19. The mar­gins are likely to be pos­i­tively im­pacted by INR de­pre­ci­a­tion (60% of the to­tal rev­enue is de­rived from USA) and op­er­a­tional ef­fi­ciency, even as in­vest­ments have largely been baked in. Deal ve­loc­ity is good across ver­ti­cals with both Travel and ISV ver­ti­cals likely to im­prove go­ing for­ward.

Its re­tail busi­ness has ob­tained good deals although rev­enue could take some time to scale up.

We like SSL’s dif­fer­en­ti­ated busi­ness, qual­ity bal­ance sheet, high RoE (re­turn on eq­uity) and lack of eq­uity di­lu­tion for the last 17 years. The Mi­crosoft al­liance will be a key growth driver and SSL has con­ducted Mi­crosoft Stack So­lu­tion (MS) show­cases in Dubai, Lon­don, USA and In­dia and won deals as well. Ac­qui­si­tion op­por­tu­ni­ties are also be­ing closely eval­u­ated with a po­ten­tial size of $5-25 mn, mainly in the MS ecosys­tem.

Tech­ni­cal Out­look: The stock looks good on the daily chart for medium-term in­vest­ment. It is mak­ing a ‘higher high and higher low’ for­ma­tion on the daily chart. The re­cent cor­rec­tion in its share price of­fers an op­por­tu­nity to en­ter. The stock trades be­low all im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart. Start ac­cu­mu­lat­ing at this level of Rs.317.25 and on dips to Rs.297 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.375+ in the next 12 months.

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