In the world of stock investing, small-cap stocks have always been viewed as a high-risk, high-reward proposition. While these stocks offer the potential for significant returns, they are also known for their volatility and unpredictability.
One such small-cap IT stock, Sonata Software, has so far experienced an impressive surge in 2023. The company's shares have climbed from ₹563.70 apiece to ₹887.20, generating a fabulous return of 57.38%. This recent stock boom has resulted in a stunning 551% gain over the last three-year period.
During the last trading session, the stock jumped 4.22% to hit a record high of ₹903, surpassing its previous high of ₹889. Additionally, the stock has exhibited a substantial growth of over 45% in the last one-year period, in contrast to the movement in the Nifty50 index, which has increased by only 0.74% during the same period.
Sonata Software is a leading modernization and digital engineering company, headquartered in Bangalore, providing services using its proprietary Platformation approach.
The company specializes in cloud and data modernization, Microsoft Dynamics, digital contact center setup and management, managed cloud services, and digital transformation services. Sonata has partnerships with leading technology providers such as Microsoft, Amazon, and Google, among others, its website shows.
Recently in March, the company signed its largest-ever contract with a total contract value (TCV) of $160 million for ten years with a US-based consumer retail company. Sonata will be managing end-to-end IT modernization and transformation for the client.
The company aims to achieve $0.5 billion in revenue over the next 4 years (by doubling organic revenues to $400 million + another $100 million through acquisition scale-up) and so will be continuously investing 1.5% of sales for the next 2-3 years to drive revenue growth, said brokerage firm Nuvama Professional Clients group.
The company has recently acquired the entire stake of Quant Systems (QS), which is based in the US, for a total consideration of $160 million. This acquisition will enable the company to add capabilities and expand the size of opportunities, said the brokerage firm.
Further, the company has ₹600 crore in cash and cash equivalents and yearly operating cash flows of ₹460 crore ( ₹443 crore in FY21, ₹486 crore in FY22).
The company's strong operating cash flow is expected to continue and increase in line with revenue growth. This will enable the company to finance acquisitions and investments while also maintaining dividends.
However, due to technical reasons, SSL will take on short-term debt to fund the initial payments for the QS deal, according to Nuvama.
Meanwhile, the company's management asserted that even though the recession overhang is present, no impact has been seen on the ground yet. So, the deal pipeline and demand environment from their clients set are unaffected and positive as of now.
Going further, the brokerage expects the company will continue to maintain a strong growth trajectory in the future, propelled by several factors. Firstly, higher reinvestment is expected to accelerate growth. Secondly, there are ample opportunities in the BFSI vertical, which is the highest spending vertical on IT, it said.
Furthermore, the company has a robust and stable relationship with Microsoft. Finally, acquisitions are predicted to significantly increase the company's offering portfolio.
06 analysts polled by MintGenie on an average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
