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Saturday, January 13, 2018

Value Pick Stock - Sonata Software - ROI @ 75% in 1.5 Years

Dear Reader,

We are pleased to inform you that our Value Pick stock of June 2016 - Sonata Software Ltd (BSE Code: 532221, NSE Code: SONATSOFTW) which was released on 10th July'16 is giving as on date returns of 168% to our Value Picks members. We suggested Buy on Sonata Software at price of Rs. 171 on 10th July'16 with a target price of Rs. 240. Stock has already achieved our target price and we advise our members to continue to hold the stock. Sonata Software stock price made its 52 week high of Rs. 312 on NSE recently and closed at Rs. 299.40 yesterday giving absolute returns of 75% in period of 18 months.

Below is the summary of Sonata Software Ltd shared by us under Value Pick stock - Jun'16 released on 10th July 2016.

1. Company Background:

A mid-sized IT services company headquartered in Bangalore, Sonata Software has presence in the US, UK, Europe, APAC and Middle East. The company operates in two major business units: International IT services (IITS) and domestic products and services (DPS).

Within IITS, the company caters to travel, retail & CPG, and OPD verticals. Sonata provides consulting, ADM, ERP, testing and IMS. In the DPS segment, the company, through its subsidiary Sonata Information Technology Limited, sells software products in India. These include licences for Microsoft, SAP, Oracle, Abode, IBM, HP and TIBCO.

Sonata is a global IT services company with a track record of serving leading Independent Software Vendors and Enterprise Customers around the globe. Its unrelenting focus on going deeper with domain knowledge, technology expertise and customer commitment, coupled with people skills, strong delivery mechanism and expanding global footprint makes it a strategic IT partner of choice. Sonata's services are as under:

Product Engineering and Services: Sonata offers end to end product engineering services from high end technology consulting to product lifecycle management and professional services.Sonata's dedicated Centers of Excellence in the areas of Java, .NET, Cloud, Mobility and BI equip it with the right skills in technologies and processes, consolidate its experiences and develop thought leadership so that the company can effectively serve our customers.

Application Development and Management: Sonata provide application development and management services leveraging Open Source and Microsoft technologies. Its Application Development and Management services are strategic, in that it works closely with customer's business functions, understand the pain points, identify areas of improvement, and provide holistic solutions and support that translate to tangible business results.

Testing Services: Sonata offers specialized testing services like integration testing, Functional & Regression testing, Performance testing, Security testing, Enterprise Applications testing, Globalization / localization testing, Compatibility testing, Deployment testing, Product configuration testing, Web services testing, Mobility testing, Data migration / product upgrade testing etc.

Cloud Computing: Sonata's Cloud computing specialists analyze customer’s current IT application and infrastructure portfolio to Create a Cloud computing strategy, build a business plan and design a roadmap for Cloud adoption; Identify and recommend suitable Cloud Computing models for various IT and business needs - IaaS, PaaS, SaaS, Identify and recommend appropriate deployment models – Public Cloud, Private Cloud or Hybrid Cloud.

Infrastructure Management: Today, more than ever, developing thoughtful IT Infrastructure Management strategy and partnerships has become very critical for business success. With over 15years of experience and 30+ customer engagements, Sonata knows what it takes to derive the best from investments in IT infrastructure. It leverages its in-depth industry knowledge, best practices, technical expertise and Global Delivery Model to offer consultancy, design, implementation and Remote Infrastructure Management Services that matter.

2. Recent Development: (as on 10th July'16)

i) Sonata Software exhibits leading digital travel technology solutions at the Arabian Travel Market – April 2016

Sonata powers some of the largest players in the tour operator, corporate travel, online travel, rail and airline segments across the globe with its technology solutions. At the event, Sonatashowcased its digital travel solutions and platforms that provide a complete end-to-end solution for managing customer experience and smart operations to help reinvent travel businesses.

These travel solutions are built on proven technologies and include Rezopia, a cloud-based travel ERP system, TravelPlus a hybris based travel commerce accelerator, Halosys, a unified enterprise mobility platform, and Transit – big data ready analytical platform for the travel vertical. These solutions from Sonata have won recognitions such as hybris Most Innovative Partner award and Travel Weekly Magellan awards.

ii) Sonata's Technology Infrastructure Group receives SAP® APJ Partner Excellence Award 2016 for "Top Sell Partner" – Feb 2016

Sonata’s Technology Infrastructure Group informed that it is the recipient of an SAP® APJ Partner Excellence Award 2016 for Top Sell Partner. Awards were presented by SAP (NYSE: SAP) to the top-performing SAP partners in the APJ region that have made outstanding contributions to driving our customers’ digital transformation. Recipients of this year’s awards have been – in partnership with SAP – helping customers adopt innovation easily, gain results rapidly, grow sustainably and run more simply with SAP solutions

Selected from SAP’s wide-ranging partner base, nominations for the SAP Partner Excellence Awards were based on internal SAP sales data. A steering committee composed of regional and global SAP representatives determined winning partners in each category according to numerous criteria such as sales achievement and performance. Awards were presented in a variety of categories, including overall sales, innovation, technology, services and solution-specific areas.

iii) Sonata Software acquire 100% stake in Interactive Business Information Systems Inc. – Oct 2015

Sonata Software informed that its wholly owned subsidiary in Atlanta, Sonata Software North America Inc. signed definitive agreements to acquire 100% stake in Interactive Business Information Systems Inc., a Georgia Corporation which has a strategic partnership with Microsoft for the Dynamic solution and delivers world class supply chain solutions, including its proprietary advanced supply chain software solution.The acquisition has been done for an upfront payment of $8.6 million in cash and $5.4 million as earn outs payable over two calendar years ending 2017.

3. Financial Performance:

Sonata Software consolidated net profit rises 17.23% in the March 2016 quarter

Net profit of Sonata Software rose 17.23% to Rs 40.83 crore in the quarter ended March 2016 as against Rs 34.83 crore during the previous quarter ended March 2015. Sales rose 37.78% to Rs 540.44 crore in the quarter ended March 2016 as against Rs 392.26 crore during the previous quarter ended March 2015.

For the full year, net profit rose 18.62% to Rs 158.59 crore in the year ended March 2016 as against Rs 133.70 crore during the previous year ended March 2015. Sales rose 15.35% to Rs 1938.52 crore in the year ended March 2016 as against Rs 1680.51 crore during the previous year ended March 2015. 

Sonata Software consolidated net profits rises 12.66% in the Dec 2015 quarter

Net profits of Sonata software rose 12.66% to Rs. 40.23 crore in the quarter ended Dec 2015 as against Rs. 35.71 crore during the previous quarter ended Dec 2015. Sales rose 11.83% to Rs. 521.56 crore in the quarter ended Dec 2015 as against Rs. 466.37 crore during the previous quarter ended Dec 2014.

4. Investment Rationale: (as on 10th July'16)

i) Within the IITS segment, Sonata serves three focus verticals: Travel, Retail and CPG, and OPD. The others segment comprises smaller verticals such as manufacturing, pharma and financial services. Sonata provides ADM, ERP, testing, business intelligence, cloud and IMS services to clients in these verticals. From a service line perspective, Sonata derives maximum revenue from ADM, followed by testing, AX (Microsoft Dynamics ERP, IMS and e-commerce.

ii) Sonata is targeting to double the IITS revenue in the next 3 years, thus implying US $200mn revenue by FY19. Company needs to grow its revenue in this segment by 22-23% CAGR over FY16-FY19 which seems to be challenging considering growth in past. However, the company may go through the acquisitive route to drive its revenue growth to achieve the same.

iii) Sonata continues to build, integrate and acquire platforms across Ecommerce, Analytics & DevOps to complete portfolio for ‘Future Ready’ IP led solutions. Sonata offers platforms like Rezopia (Reservation, Distribution, Contracts & Operations on one single Cloud Platform), Halosys (Core features of MADP, MAM, MBaaS & APIs on a single, unified mobile platform), IBIS (Advanced Supply chain Software for Distributors, Manufacturers & Retailers) and RETINA (Big Data ready Retail Analytics Platform).

iv) Sonata offers Cloud & Mobile engineering ERP for SaaS enablement, Engineering Omni Channel retail systems on a new technology stack and enables next gen Rail reservation and ancillary services. Company’s solution Rezopia Travel SAAS is customized to next gen reservation systems, it is cost effective and offers quick transition from legacy systems & continuous feature upgrades with releases.

v) Sonata is increasing its focus on technology platforms. The company acquired Rezopia, a cloudbased travel ERP platform in August 2014 and Halosys, an enterprise mobility technology provider, in August 2015. While Rezopia is a vertical-focused platform, Halosys can be offered as a vertical-agnostic one and can be sold across verticals. This can be a potential growth driver over the next few years for the company.

vi) Travel and retail have been key growth verticals for Sonata over the past six quarters and account for 54% of revenues, we expect company to deliver robust growth in these verticals going forward. From a geographical perspective, the IITS segment derives a majority of its revenue from the US (51%), 34% from Europe (including the UK) and the balance from emerging markets like Dubai, Qatar and India. We expect the US to remain the key growth driver going forward.

vii) The DPS (Domestic Products and Services) business enables the company to build strategic partnerships with large ISVs. Sonata runs this business through its subsidiary, SonataInformation Technology Limited. The company distributes product licences of numerous large ISVs such as Microsoft, Oracle, IBM and TIBCO. While margins are low owing to its trading nature, the segment allows Sonata to establish strategic relationships with major ISVs, thus driving cross-selling efforts in its IITS business.

viii) Technology Infrastructure is a strategic fit to overall Sonata business. Company offers wide portfolio of technology solutions with leading and emerging partners which includes Microsoft, SAP, Oracle, IBM, Adobe, Symantec, Redhat, Intel, Informatica, Appcelerator etc. Strategic partnerships with leading technology providers – Microsoft, SAP, Oracle, Appcelerator act an advantage in accessing emerging technology solutions. It provides 360 degree footprint across Engineering, Implementation, Go to Market in IT value chain in key technologies – e.g. Dynamics AX.

ix) The company wants to focus on higher value added products such as cloud and security to drive growth and margins in its DPS business. Owing to its capex-light nature, the business earns healthy RoCE of 25%. The key focus areas for Sonata in the DPS segment are improving margins and RoCE, with its capex-light nature driving higher asset turns.

x) Company is maintaining healthy dividend payout of 55% which is significantly high compared to other players. Dividend paid by the company is increased from Rs. 0.50 per share in FY12 to Rs. 9.00 in FY16. Dividend yield at current market price of Rs. 171.20 is 5.3% which is quite attractive and limits the down side risk in stock price from current levels.

xi) The company has delivered profit and sales CAGR of 10.4% and 4% respectively over last 5 years. Return on equity (ROE) in last 5 years is at 14.3% which is improved to 32.7% over last 12 months. Promoter’s shareholding in the company as on Jun’16 is 30.95% out of which 1.15% is pledged, institutional and non-institutional shareholding in the company is 16.67% and 50.90% respectively.

5. Key Concerns & Risks:

i) With a significant portion of company’s revenues coming from exports, volatility in exchanges may impact company’s business adversely. The company transacts its revenue in more than one currency, this exposes it towards a risk of making losses as a result of currency price fluctuation. The company uses foreign currency forward contracts to hedge its risks associated with foreign currency fluctuation.

ii) Regional concentration as well as vertical concentration can adversely impact company’s business in case of a slowdown. As like for all mid-tier IT services companies client concentration is a significant risk. The company’s top clients contribution is nearly 70% of revenues of IT services. However, the company monitors this risk and continues to further diversify its business in terms of regional and vertical exposure on ongoing basis.

iii) The ever increasing competition poses a key risk in terms of acquiring client business as well as human talent.

6. Saral Gyan Recommendation: (as on 10th July'16)

As per our estimates, company can deliver PAT of 188 crores for full financial year 2018, annualized EPS of Rs. 17.9 with forward P/E ratio of 9.6X for FY18 which makes it attractively valued compared to other mid-size companies operating in IT sector.

Considering growth prospects with improving operating metrics, healthy balance sheet and high dividend yield with attractive valuations compared to peer companies,​ Saral Gyan team recommends "Buy" on Sonata Software Ltd at current market price of Rs. 171 for target of Rs. 240 over period of 12 to 24 months.

Buying Strategy:
  • 60% at current market price of 171
  • 40% at price range of 145-150 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

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Wish you happy & safe Investing.


Team - Saral Gyan