RESULTS REVIEW 2QFY18 15 NOV 2017 Sonata Software BUY HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters IP-led strategy on track Sonata delivered robust numbers in 2QFY18. International IT services (IITS) revenue grew 11.2% QoQ (+10.3% CC, +6.8% QoQ excl. one-off) to USD 36.4mn, ahead of our estimate of USD 34.0mn. A positive takeaway was sustained recovery in OPD (29% of rev, +7.7% QoQ) and Travel (27% of rev, +7.4% QoQ). Strong growth in Dynamics AX (19% of rev, +25% QOQ) is driven by traction in Retail, while the focus on IPs and Platforms is driving Digital revenue (32% of rev, +15% QoQ). Total revenue stood at Rs 4.27bn, down 32.7% QoQ, led by drop in Domestic Product & Services’ (DPS) revenue (Rs 2.00bn, -53/-32% QoQ/YoY). IITS’ business strategy is to provide business solutions wrapped with IPs (Rezopia, Halosys, Brick & Click and RETINA). This is a major differentiator for Sonata, and is the base of its Platformation strategy. This is driving IP- led revenue, which grew 19.4% QoQ (15% of IITS rev). Management is targetting double-growth in IITS business, led by OPD, Retail (Brick & Click Platform) and Travel (SAP Hybrid s and Rezopia) verticals. We expect IITS’ USD revenue to grow 18/14% in FY18/19E, and its margin will be in the range of 17-18%. We like Sonata’s IP-focussed business model, capability to scale up top accounts, quality balance sheet (net cash of Rs 27/share, ~15% of Mcap), high RoE (~30%), high dividend yield (~5.0%) and reasonable valuations. Maintain BUY with a TP of Rs 230 12x Sep-19 EPS. Highlights of the quarter AX and E-commerce were outliers: IMS grew 5.2% QoQ, but growth will slow down owing to a shift to cloud. ADM/AX/e-comm. grew 11/25/34% QoQ. Retail grew 21% QoQ, led by AX and traction in IPs. Consolidated EBITDA margin expanded 531bps QoQ to 12.8%, owing to higher margins in the DPS (7.0%, +348 bps QoQ) and IITS business (+176bps QoQ to 17.6% vs our exp. of 17.0%). IITS margin expansion was led by a recovery in the IBIS margin (11% vs 5% QoQ). Near-term outlook: We expect IITS’ revenue growth to be soft in 3Q. IITS’ margins will expand gradually,with recovery in IBIS and higher IP revenue. The stock is available at a decent discount (~30%) to the mid-cap IT average multiple. Financial Summary YE Mar (Rs mn) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) FY16 FY17 FY18E FY19E FY20E Net Sales 4,269 5,005 (14.7) 6,345 (32.7) 19,405 25,211 25,602 28,873 32,502 EBITDA 547 510 7.3 477 14.8 1,919 1,923 2,036 2,352 2,725 APAT 454 380 19.5 432 5.1 1,586 1,537 1,645 1,880 2,133 Diluted EPS (Rs) 4.3 3.6 19.5 4.1 5.1 15.1 14.6 15.6 17.9 20.3 P/E (x) 12.6 13.0 12.2 10.6 9.4 EV / EBITDA (x) 8.9 9.1 8.6 7.4 6.3 RoE (%) 35.3 31.2 30.5 31.5 31.9 Source: Company, HDFC sec Inst Research # Consolidated INDUSTRY IT CMP (as on 14 Nov 2017) Rs 190 Target Price Rs 230 Nifty 10,187 Sensex 32,942 KEY STOCK DATA Bloomberg/Reuters SSOF IN No. of Shares (mn) 105 MCap (Rs bn) / ($ mn) 20/306 6m avg traded value (Rs mn) 93 STOCK PERFORMANCE (%) 52 Week high / low Rs 225 / 143 3M 6M 12M Absolute (%) 24.1 16.3 25.7 Relative (%) 19.4 7.2 2.9 SHAREHOLDING PATTERN (%) Promoters 30.95 FIs & Local MFs 2.10 FPIs 11.56 Public & Others 55.39 Source : BSE Amit Chandra [email protected]+91-22-6171-7345 Apurva Prasad [email protected]+91-22-6171-7327
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RESULTS REVIEW 2QFY18 15 NOV 2017
Sonata Software BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
IP-led strategy on trackSonata delivered robust numbers in 2QFY18. International IT services (IITS) revenue grew 11.2% QoQ (+10.3% CC, +6.8% QoQ excl. one-off) to USD 36.4mn, ahead of our estimate of USD 34.0mn. A positive takeaway was sustained recovery in OPD (29% of rev, +7.7% QoQ) and Travel (27% of rev, +7.4% QoQ). Strong growth in Dynamics AX (19% of rev, +25% QOQ) is driven by traction in Retail, while the focus on IPs and Platforms is driving Digital revenue (32% of rev, +15% QoQ). Total revenue stood at Rs 4.27bn, down 32.7% QoQ, led by drop in Domestic Product & Services’ (DPS) revenue (Rs 2.00bn, -53/-32% QoQ/YoY).
IITS’ business strategy is to provide business solutions wrapped with IPs (Rezopia, Halosys, Brick & Click and RETINA). This is a major differentiator for Sonata, and is the base of its Platformation strategy. This is driving IP-led revenue, which grew 19.4% QoQ (15% of IITS rev).
Management is targetting double-growth in IITS business, led by OPD, Retail (Brick & Click Platform) and Travel (SAP Hybrid s and Rezopia) verticals. We expect IITS’ USD revenue to grow 18/14% in FY18/19E, and its
margin will be in the range of 17-18%. We like Sonata’s IP-focussed business model, capability to scale up top accounts, quality balance sheet (net cash of Rs 27/share, ~15% of Mcap), high RoE (~30%), high dividend yield (~5.0%) and reasonable valuations. Maintain BUY with a TP of Rs 230 12x Sep-19 EPS.
Highlights of the quarter AX and E-commerce were outliers: IMS grew 5.2%
QoQ, but growth will slow down owing to a shift to cloud. ADM/AX/e-comm. grew 11/25/34% QoQ. Retail grew 21% QoQ, led by AX and traction in IPs.
Consolidated EBITDA margin expanded 531bps QoQ to 12.8%, owing to higher margins in the DPS (7.0%, +348 bps QoQ) and IITS business (+176bps QoQ to 17.6% vs our exp. of 17.0%). IITS margin expansion was led by a recovery in the IBIS margin (11% vs 5% QoQ).
Near-term outlook: We expect IITS’ revenue growth to be soft in 3Q. IITS’ margins will expand gradually,with recovery in IBIS and higher IP revenue. The stock is available at a decent discount (~30%) to the mid-cap IT average multiple.
IITS’ revenue grew 11.0% QoQ, while DPS revenue declined 53.4% in INR terms. Consolidated EBITDA margin expanded owing to strong DPS (+348bps QoQ to 7.0%) and IITS (+176bps QoQ to 17.6%) margins IITS’ investments are almost complete, and margin expanded with growth and IBIS recovery (IBIS EBITDA margin stood at 11% vs 5% in the last quarter), and higher IP revenue PAT stood at 0.45bn, up 7.0% QoQ, owing to higher EBITDA and lower tax rate
EBITDA % IITS 17.6 19.8 (218) 15.8 176 DPS 7.0 4.8 221 3.5 348 Total EBITDA % 12.7 11.0 172 7.6 513 Source: Company, HDFC sec Inst Research, IITS EBITDA excludes other income and income tax refunds, #excludes other income, as per company reporting
OPD, the largest vertical for Sonata, has grown strongly in the last two quarters, led by the Microsoft partnership Retail recovered sharply, and will be an important growth driver powered by Microsoft AX and Brick and Click Platform
Microsoft AX has registered strong growth for the second consecutive quarter, driven by the Retail vertical Sonata’s digital revenue stood at 32% of IITS’ revenue (vs 31% in last quarter)
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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