RESULTS REVIEW 4QFY19 31 MAY 2019 Sonata Software BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters IP-led growth strategy on track We maintain BUY on Sonata based on inline 4QFY19. Robust growth in IP-led revenue (+41% YoY) and margin expansion in IITS (~483 bps in FY19) is encouraging. Our TP of Rs 480 (+34% upside) is based on 16x FY21E EPS. HIGHLIGHTS OF THE QUARTER International IT services (IITS) revenue increased 6.6% QoQ (organic ~3%) to USD 43.5mn, in-line with our est of USD 43.7mn. Growth was led by IP-led revenue (+21.1% QoQ). Acquisition of Scalable Data and Sopris will strengthen Sonata’s Microsoft Dynamics AX capability, which has grown at 8qtr CQGR of 9.6% . IITS margin expanded 483bps YoY to 23.5% in FY19 fueled by growth in IP-led business, high utilisation (86%) and operational efficiency. However, with limited margin levers available, the desired range is 22- 24%. It is still second highest in the Tier-2 IT pack. Total Revenue was down 1% QoQ to Rs 8.36bn due to 4.7% decline in Domestic Product & Services (DPS) revenue. DPS performance is measured on absolute EBITDA, which stood at Rs 0.21bn (+8.7% QoQ). IP-led and Digital grew by 9.7/21.1% QoQ and stood at 36.0/21.7% of revenue. ~61% of the incremental revenue of IITS came from IP-Led services. IP-led focus has been a successful strategy for Sonata (8qtr CQGR of 10.3%) and also led to strong margin performance . Near-term outlook: We expect revenue growth to continue supported by IP-led, Dynamics AX and integration of Scalable Data. IITS margins will be stable and salary hike impact will come in 1Q and 3QFY20E. STANCE: Growth at reasonable valuations Sonata’s platformation strategy to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina, is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Microsoft Dynamic 365 is in hyper growth phase and Sonata being a preferred development partner is reaping benefits. Sonata strategic acquisition of Sopris and Scalable Data will enhance Dynamics 365 offerings and will support growth. We expect IITS’ USD revenue to grow 15/11% with margin of 22.6/23.0% in FY20/21E. We like Sonata’s IP-focussed business model, strong relationship with top-clients, high RoE (~35%) and dividend yield of ~3%. The stock trades at a P/E of 11.9x FY21E, which is reasonable (~10% discount to tier-2 IT median). Risks include high client concentration, slow down in Dynamics 365 and drop in margins due to onsite investments. Financial Summary YE March (Rs bn) 4QFY19 4QFY18 YoY (%) 3QFY19 QoQ (%) FY17 FY18 FY19P FY20E FY21E Net Revenues 8.36 6.26 33.5 8.44 (1.0) 23.71 24.54 29.61 32.59 35.04 EBITDA 0.88 0.64 39.1 1.00 (11.4) 1.92 2.31 3.36 3.74 4.18 APAT 0.64 0.54 18.7 0.64 0.8 1.56 1.93 2.49 2.80 3.11 Diluted EPS (Rs) 6.2 5.2 18.7 6.2 0.8 15.1 18.6 24.0 26.9 29.9 P/E (x) 23.7 19.2 14.9 13.3 11.9 EV / EBITDA (x) 18.0 14.2 10.4 9.0 7.9 RoE (%) 29.3 31.0 35.1 34.2 33.8 Source: Company, HDFC sec Inst Research # Consolidated INDUSTRY IT CMP (as on 31 May 2019) Rs 356 Target Price Rs 480 Nifty 11,923 Sensex 39,714 KEY STOCK DATA Bloomberg SSOF IN No. of Shares (mn) 105 MCap (Rs bn) / ($ mn) 37/536 6m avg traded value (Rs mn) 43 STOCK PERFORMANCE (%) 52 Week high / low Rs 429/265 3M 6M 12M Absolute (%) 5.3 16.2 (4.5) Relative (%) (5.4) 6.5 (16.9) SHAREHOLDING PATTERN (%) Dec-18 Mar-19 Promoters 28.17 28.17 FIs & Local MFs 7.85 9.87 FPIs 15.22 13.83 Public & Others 48.76 48.13 Pledged Shares 0.00 0.00 Source : BSE Amit Chandra [email protected]+91-22-6171-7345 Apurva Prasad [email protected]+91-22-6171-7327 Akshay Ramnani [email protected]+91-22-6171-7334
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RESULTS REVIEW 4QFY19 31 MAY 2019
Sonata Software BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
IP-led growth strategy on trackWe maintain BUY on Sonata based on inline 4QFY19. Robust growth in IP-led revenue (+41% YoY) and margin expansion in IITS (~483 bps in FY19) is encouraging. Our TP of Rs 480 (+34% upside) is based on 16x FY21E EPS. HIGHLIGHTS OF THE QUARTER
International IT services (IITS) revenue increased 6.6% QoQ (organic ~3%) to USD 43.5mn, in-line with our est of USD 43.7mn. Growth was led by IP-led revenue (+21.1% QoQ). Acquisition of Scalable Data and Sopris will strengthen Sonata’s Microsoft Dynamics AX capability, which has grown at 8qtr CQGR of 9.6%.
IITS margin expanded 483bps YoY to 23.5% in FY19 fueled by growth in IP-led business, high utilisation (86%) and operational efficiency. However, with limited margin levers available, the desired range is 22-24%. It is still second highest in the Tier-2 IT pack.
Total Revenue was down 1% QoQ to Rs 8.36bn due to 4.7% decline in Domestic Product & Services (DPS) revenue. DPS performance is measured on absolute EBITDA, which stood at Rs 0.21bn (+8.7% QoQ).
IP-led and Digital grew by 9.7/21.1% QoQ and stood at 36.0/21.7% of revenue. ~61% of the incremental revenue of IITS came from IP-Led services. IP-led focus
has been a successful strategy for Sonata (8qtr CQGR of 10.3%) and also led to strong margin performance.
Near-term outlook: We expect revenue growth to continue supported by IP-led, Dynamics AX and integration of Scalable Data. IITS margins will be stable and salary hike impact will come in 1Q and 3QFY20E.
STANCE: Growth at reasonable valuations Sonata’s platformation strategy to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina, is yielding results. Growth in IP-led revenues is improving employee productivity and aiding margin expansion. Microsoft Dynamic 365 is in hyper growth phase and Sonata being a preferred development partner is reaping benefits. Sonata strategic acquisition of Sopris and Scalable Data will enhance Dynamics 365 offerings and will support growth. We expect IITS’ USD revenue to grow 15/11% with margin of 22.6/23.0% in FY20/21E. We like Sonata’s IP-focussed business model, strong relationship with top-clients, high RoE (~35%) and dividend yield of ~3%. The stock trades at a P/E of 11.9x FY21E, which is reasonable (~10% discount to tier-2 IT median). Risks include high client concentration, slow down in Dynamics 365 and drop in margins due to onsite investments.
IITS’ revenue grew 6.6% QoQ (~3% Organic) and DPS revenue grew 38.0% YoY to Rs 5.36bn in INR terms IITS’ EBITDA% was 22.5% following a high margin of 28.4% in 3Q FY19 IITS EBITDA% was at 23.5% (vs. 18.6% in FY18) Higher other income was partly due to lower forex loss of Rs 33mn vs. (loss of Rs 66mn in 3Q) APAT stood at Rs 0.64bn up 0.8% QoQ (vs. our exp of Rs 0.64bn) Tax rate for FY20 would be ~29%
DPS business is lumpy in nature due to closure of large deal in a particular quarter. The best way to measure its performance is on absolute EBITDA basis, which was up 8.7% QoQ and 24.5% in FY19 IITS EBITDA% normalized at 22.5% in the quarter but FY19 improvement has been significant (+483bps). The benefits of IP-led shift and cost rationalisation is reflecting in margins OPD/Travel/Retail has grown at an eight quarter CQGR of 3.0/4.9/4.9% respectively Out of the total 159 customers 104/15/12 are in Retail/OPD/Travel respectively
Broad based growth across service lines is driven by IP-led revenue (21.7% of rev, up 10.3% 8-qtr CQGR) Growth in 4Q was powered by AX (22% of rev, up 17.3% QoQ) led by acquisition of Sopris and Scalable Data Microsoft Dynamics AX has growth at an 8-quarter CQGR of 9.6% (company average is 4.5%) ADM/Testing has grown at an 8 Qtr CQGR of 3.9/4.5%
Growth was broad based across geographies with USA/Europe/RoW up 4.7/6.6/15.5% QoQ Onsite growth was +9.2% QoQ, onsite outpaced offshore growth which was up 4.8% QoQ
Top 5/10 clients grew strongly for the second consecutive quarter Growth in tail accounts (Non-Top 10) was also robust at 10.1% QoQ Added 3 new customers in 4QFY19 (vs. 9 in 3Q) in IITS business
SONATA SOFTWARE: RESULTS REVIEW 4QFY19
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IITS Rev Growth Trend IITS EBITDA, Margin Trend
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
IITS Headcount IITS Debtor Days
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
IITS revenue/EBITDA has grown at CQGR of 4.5/9.7% over the last eight quarter IITS EBITDA margin will be in the range of 22-24% hearon, near term headwinds to margins are wage hike in (1Q & 3Q FY20), margin expansion to come from higher revenue growth with increased productivity Avg. revenue per employee in 4Q was USD 45,207, +3.8/-0.1% QoQ/YoY, Avg. revenue per employee for FY19 was USD 44,784 up 1.5% YoY IITS debtor days are among the lowest in the industry at 40-42 days
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
DPS’ Headcount DPS’ Debtor Days
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
DPS EBITDA has grown at a CQGR of 5.2% over the last eight quarter DPS’ debtor days have gone up to 47 days (vs. 42 in 3Q) increase in debtor days is largely attributable to timing difference of collection
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