Sonata Software: Down 15% in August, a temporary blip or long-term opportunity? Systematix sees 23% upside potential
Sonata Software's stock has declined nearly 30% from its peak in February 2024, but brokerage house Systematix remains optimistic, issuing a buy call with a target price of ₹760, citing strong long-term growth drivers.
Sonata Software has faced a challenging year, with its stock down nearly 30 percent from its peak in February 2024. Despite this significant correction, brokerage house Systematix remains optimistic about the company’s long-term prospects, viewing the recent downturn as a temporary blip rather than a sign of deeper troubles.
Systematix has initiated coverage on Sonata Software with a buy call and set a target price of ₹760, suggesting an upside potential of 23 percent from the current market price. The brokerage’s optimism is rooted in the belief that the company’s fundamental growth drivers remain intact, despite recent volatility.
In the last year, Sonata Software's stock has risen by 21 percent, though it has declined by 16 percent year-to-date in 2024. The stock’s performance in August has been particularly weak, with a loss of over 15 percent, following two consecutive months of gains. In July, the stock surged over 24 percent, and in June, it jumped by 15 percent. However, this positive momentum was preceded by a three-month correction, with the stock falling 25.5 percent in May, 4.3 percent in April, and 11 percent in March. Notably, the stock has still gained 32 percent from its 52-week low of ₹469.05, reached on June 4, 2024.
The past six months have been marked by volatility for Sonata Software, largely driven by market concerns over a potential slowdown ahead of its fourth-quarter results. The company's decision to defer its FY26 guidance to FY27 may have contributed to the recent price correction. Despite expectations of muted performance in FY25, Systematix is confident that Sonata Software’s long-term growth prospects remain strong, supported by recently secured deals and a strategic focus on large-scale contracts.
"Management’s deferral of FY26 guidance to FY27 could have triggered the recent price correction. Although we expect muted performance in FY25, long-term growth drivers seem intact in terms of recently won deals as well as focus on large deals by the company. SSOF’s partnership with Microsoft also helps to sustain growth momentum. We initiate coverage on SSOF with a BUY rating, and value the company at 25x FY27E EPS to arrive at a target price of ₹760 per share, which offers a 22 percent upside from CMP," said the brokerage.
However, Systematix also cautioned investors about potential risks to its estimates. Higher-than-anticipated earnouts, similar to those in FY24 that negatively impacted profitability, and any miss on FY27 revenue guidance could pose challenges to the company’s growth trajectory.
Q1FY25 Performance
Sonata Software recently reported a 12 percent year-on-year drop in its consolidated net profit, totaling ₹106 crore for the quarter ending in June (Q1FY25). This was the largest intraday drop in the stock in two months. Despite the profit decline, the company’s revenue from operations increased by 25 percent year-on-year to ₹2,527 crore. However, EBITDA remained flat on a year-on-year basis at ₹176.2 crore.
Investment Rationale
Systematix maintains a positive outlook on Sonata Software, even after the company extended its revenue targets. The brokerage firm highlights Sonata's strong partnerships with tech giants like Microsoft, Oracle, and IBM as key growth drivers.
Sonata Software's IT services division saw significant momentum following the appointment of new CEO Samir Dhir in April 2022. According to the brokerage, this uptick is attributed to several strategic moves: the recruitment of key leadership, securing a major $160 million contract, a series of subsequent deals, the acquisition of Quant, and a robust and growing deal pipeline estimated at over $1 billion. Additionally, large deals now make up more than 40 percent of this pipeline.
Sonata has shifted its $500 million revenue goal for its core business to FY27, requiring a 16 percent CAGR in dollar terms from FY24-27. Similarly, its consolidated $1.5 billion revenue target has been moved to FY27, with a required 13 percent CAGR. Despite these adjustments, Systematix expects a 16.7 percent INR revenue CAGR and a 20.4 percent earnings growth over FY24-27.
Systematix anticipates a temporary dip in margins to 8.9 percent in FY25 but expects recovery driven by operational efficiencies. The brokerage views the recent stock correction as a buying opportunity.
For investors considering Sonata Software, Systematix’s analysis suggests that the recent correction could represent a buying opportunity rather than a cause for concern. While the company faces short-term challenges, its strategic partnerships, focus on large deals, and long-term growth drivers position it well for future success. The target price of ₹760 offers a compelling upside potential, making Sonata Software a stock to watch closely in the coming months.
Sonata Software (SSOF IN) is a global IT services and solutions company headquartered in Bangalore, India. Founded in 1986, the company has grown into a leading provider of IT consulting, software development, and digital transformation services, catering to an array of retail, manufacturing, distribution, travel, and software product companies.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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