Shares of multi-bagger IT firm Sonata Software, which has surged nearly 350 percent in the last 5 years, have lost over 30 percent of its investors wealth since October 2021.
The stock hit its 52-week high of ₹1,025 on October 20, 2021, since then it has lost as much as 31 percent to its current market price of ₹701. It also hit its 52-week low of ₹610 in June 2022.
In the past 1 year, the stock has lost 8 percent and has shed nearly 20 percent in 2022 so far. However, the stock has added 5 percent in July so far on the back of strong June quarter earnings.
Sonata is primarily engaged in the business of delivering information technology (IT) services and software solutions. It provides solutions for travel, rail and airline companies by integrating technologies, such as Omni-channel commerce, mobility, analytics, cloud and enterprise resource planning.
Peers
Despite the 8 percent decline in the last 1 year, Sonata Software has been the top performer among its peers. Among peers, Firstsource Solutions fell the most, it lost nearly half of its investor wealth in the last 1 year. Meanwhile, Route Mobile tanked 43 percent in the last 1 year, Tanla Platforms shed 37 percent, Happiest Minds is down 33 percent, Mastek declined 20 percent, and Cyient fell 19 percent.
Earnings
Sonata’s consolidated net profit for the June quarter rose 24 percent YoY to ₹107.80 crore as compared to ₹86.70 crore in the year-ago period. Sequentially, the profit was up around 7 percent from ₹100.90 crore in the March quarter of FY22.
Its consolidated revenue also jumped 40 percent YoY to ₹1,778.90 crore in Q1FY23 as compared to ₹1,268.50 crore in the previous corresponding quarter. It grew 22 percent sequentially against revenue at ₹1,463.60 crore in the quarter ended March 2022. Consolidated EBITDA of the firm during the quarter under review also advanced 24% YoY to ₹159.80 crore, as against ₹129.10 crore in the quarter ended June 2021, and 4 percent on a QoQ basis.
Post the earnings, the company said that talent management continues to be a major focus. "The comprehensive talent plan includes initiatives such as employee training and development, engagement, and retention, as well as capacity building for future growth and upgrading existing talent capabilities," it added.
Further, the board of directors has also announced a bonus issue in the ratio of 1 equity share for 3 shares held in the company.
What should you do now?
Brokerage house Anand Rathi remains bullish on the stock with a 'buy' call. However, it reduced the stock's target price to ₹880 per share from ₹1,020 earlier. The new target price indicated a 25 percent upside potential in the stock in 12 months.
"Sonata’s IT Services revenue growth this quarter was in line with the industry. In Q1 FY23, it grew 2 percent sequentially due to heavier cross-currency headwinds compared to some of its peers. It had been growing faster than the industry for the previous four quarters and delivered 5 percent QoQ on a constant-currency basis. The company said that demand is robust but supply-side challenges are a concern. It expects the supply side to ease up a bit in H2," the brokerage said in its report.
The brokerage noted that Sonata’s margin was 22.4 percent, down 63 bps QoQ 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, it said, adding that the India business delivered high growth.
The brokerage expects Sonata's IT services division to record a 17 percent CAGR over FY22-24 despite the Travel division’s FY24e revenue at 55 percent of FY20s. The domestic business would register a 24 percent CAGR over FY22-24, the focus being only on margins and RoE, it predicted.
"Sonata is seeing strong growth in its domestic revenue and margins, outstripping competition. Notably, working capital has come down steeply and RoEs have shot up, leading to a case of a higher multiple to the domestic business, while taking a sum-of-parts approach to the two businesses," it stated.
However, on a contrarian view, another brokerage house Prabhudas Lilladher downgraded the stock to 'hold' from 'accumulate' as it believes revenue growth will continue to be modest in the IT service division going forward since it is likely to take 2-3 quarters to overcome supply side constraints and due to the potential impact of weak macro environment.
Margins are also expected to remain under pressure due to investments in freshers, sales teams, development centres in Canada, Ireland, Mexico and leadership teams, it added. It also pointed out that growth in this quarter was impacted by supply-side constraints, project-specific delays and cross-currency headwinds.
The brokerage, however, raised its target price to ₹704 from ₹694 earlier. However, it implies almost zero percent upside from the current market price of ₹701 (as on July 27).
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
