Sonata Software Ltd
(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.