1 Sonata Software CMP* (Rs) 355 Upside/ (Downside) (%) 18 Bloomberg Ticker SSOF IN Market Cap. (Rs bn) 37 Free Float (%) 72 Shares O/S (mn) 105 IT | India Institutional Equity Research 4QFY19 Result Update | May 31, 2019 BUY Target Price: Rs420 In-Line Revenue, IP-Led Biz Continues Upward Trajectory Sonata Software’s USD revenue from IITS business rose by a healthy 6.6% QoQ to US$43.5mn. Of this, 2.5% was organic growth, while 4.1% was inorganic growth, mainly acquisitions of Scalable Data Solutions (US$1mn contribution, for full quarter) and Sopris Systems (US0.7mn contribution for half quarter). In INR terms, IITS revenue rose by 7.1% QoQ to cross Rs3bn. On the other hand, DPS revenue rose by 4.7% QoQ to Rs5.37bn, while YoY growth was robust at 38%. Consolidated revenue declined by 1% QoQ to Rs8.36bn, while YoY growth was 33.5%. Consolidated EBITDA margin declined by 124bps QoQ to 10.6% owing to steep margin decline in IITS business (down 627bps QoQ to 22.2%) led by lower margin of acquired entities (EBITDA- neutral), higher visa cost and S&M investments. On YoY basis, EBITDA margin rose 43bps and in absolute terms, EBITDA surged by a robust 39.2%. Consolidated EBIT margin declined by 137bps QoQ but rose 43bps YoY. Adjusted net profit increased by 0.8% QoQ (up 17.5% YoY) to Rs644mn, with higher other income aiding (forex gain of Rs33mn vs. loss of Rs64mn in 3QFY19). From vertical perspective, CPG & Retail vertical rose by 10.7% QoQ, albeit aided by the acquisition of SDS. On the other hand, the Travel vertical grew by a healthy 6.6% QoQ (entirely organic), while OPD revenue rose by 2.7% QoQ. Revenue from the ‘Others’ vertical rose by 6.6% QoQ. From service perspective, Microsoft AX rose by 17.3% QoQ aided by acquisitions. On the other hand, Testing, ERP, IMS, BI and e-Commerce all grew by a healthy 6.6% QoQ. Geo-wise, Europe (+6.6% QoQ) grew at a healthy pace organically, while revenue from the US and RoW grew by 4.7% QoQ and 15.5% QoQ, respectively aided by acquisitions. IP-Led Revenue – To Remain Growth & Margin Driver Sonata’s IITS revenue growth came in at a healthy 6.6% QoQ in USD terms in 4QFY19 (2.5% organic growth). The company continues to focus on platforms and IP-led solutions. Focus on consumer-centric verticals, which require high investment in digital initiatives, has been the key tailwind. In 4QFY19, 21.7% of Sonata’s revenue was IP-led (vs. 19.1% in 3QFY19), which rose by a strong 21.1% QoQ (61.8% YoY). We expect focus on platformation strategy to drive growth and profitability, going forward. Outlook & Valuation We like Sonata’s differentiated business model, focus on IP and platforms, high dividend yield, quality balance sheet, high RoE and no equity dilution for the past several years. Given the company’s platform focus, investments made in IP and S&M, decent cash generation and reasonable valuation, coupled with healthy growth, we envisage enough legroom for further upside, despite the strong stock performance over the past year. We maintain our BUY recommendation on the stock with an unchanged Target Price of Rs420. Share price (%) 1 mth 3 mth 12 mth Absolute performance 6.8 4.2 (2.8) Relative to Nifty 4.9 (5.8) (14.5) Shareholding Pattern (%) Dec'18 Mar'19 Promoter 28.2 28.2 Public 71.8 71.8 Key Financials (Rs mn) FY19 FY20E FY21E Net Sales 29,609 33,104 36,670 EBITDA 3,356 3,792 4,285 APAT 2,493 2,813 3,157 Diluted EPS (Rs) 23.7 26.7 30.0 P/E (x) 15.0 13.3 11.8 EV / EBITDA (x) 10.5 8.7 7.5 RoE (%) 35.1 33.3 31.4 1 Year Stock Price Performance Note: * CMP as on May 31, 2019 Research Analyst: Harit Shah Contact: 022 3303 4627 Email: [email protected]Quarterly Performance (Consolidated, Rs mn) Particulars 4QFY19 3QFY19 QoQ (%) 4QFY18 YoY (%) IITS Net Revenue (US$ mn) 43.5 40.8 6.6 37.4 16.3 Consolidated Net Revenue 8,356 8,440 (1.0) 6,258 33.5 EBITDA 884 998 (11.4) 635 39.2 EBIT 844 969 (12.8) 606 39.4 PBT 912 911 0.2 715 27.6 APAT 644 639 0.8 548 17.5 RPAT 654 639 2.2 548 19.2 Source: Company, RSec Research 200 250 300 350 400 450 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
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Sonata SoftwareCMP* (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Market Cap. (Rs bn) 37
Free Float (%) 72
Shares O/S (mn) 105
IT | India
Institutional Equity Research
4QFY19 Result Update | May 31, 2019
BUYTarget Price: Rs420
In-Line Revenue, IP-Led Biz Continues Upward Trajectory
Sonata Software’s USD revenue from IITS business rose by a healthy 6.6% QoQ to US$43.5mn. Of this, 2.5% was organic growth, while 4.1% was inorganic growth, mainly acquisitions of Scalable Data Solutions (US$1mn contribution, for full quarter) and Sopris Systems (US0.7mn contribution for half quarter). In INR terms, IITS revenue rose by 7.1% QoQ to cross Rs3bn. On the other hand, DPS revenue rose by 4.7% QoQ to Rs5.37bn, while YoY growth was robust at 38%. Consolidated revenue declined by 1% QoQ to Rs8.36bn, while YoY growth was 33.5%. Consolidated EBITDA margin declined by 124bps QoQ to 10.6% owing to steep margin decline in IITS business (down 627bps QoQ to 22.2%) led by lower margin of acquired entities (EBITDA-neutral), higher visa cost and S&M investments. On YoY basis, EBITDA margin rose 43bps and in absolute terms, EBITDA surged by a robust 39.2%. Consolidated EBIT margin declined by 137bps QoQ but rose 43bps YoY. Adjusted net profit increased by 0.8% QoQ (up 17.5% YoY) to Rs644mn, with higher other income aiding (forex gain of Rs33mn vs. loss of Rs64mn in 3QFY19).
From vertical perspective, CPG & Retail vertical rose by 10.7% QoQ, albeit aided by the acquisition of SDS. On the other hand, the Travel vertical grew by a healthy 6.6% QoQ (entirely organic), while OPD revenue rose by 2.7% QoQ. Revenue from the ‘Others’ vertical rose by 6.6% QoQ. From service perspective, Microsoft AX rose by 17.3% QoQ aided by acquisitions. On the other hand, Testing, ERP, IMS, BI and e-Commerce all grew by a healthy 6.6% QoQ. Geo-wise, Europe (+6.6% QoQ) grew at a healthy pace organically, while revenue from the US and RoW grew by 4.7% QoQ and 15.5% QoQ, respectively aided by acquisitions.
IP-Led Revenue – To Remain Growth & Margin Driver Sonata’s IITS revenue growth came in at a healthy 6.6% QoQ in USD terms in 4QFY19 (2.5% organic growth). The company continues to focus on platforms and IP-led solutions. Focus on consumer-centric verticals, which require high investment in digital initiatives, has been the key tailwind. In 4QFY19, 21.7% of Sonata’s revenue was IP-led (vs. 19.1% in 3QFY19), which rose by a strong 21.1% QoQ (61.8% YoY). We expect focus on platformation strategy to drive growth and profitability, going forward.
Outlook & ValuationWe like Sonata’s differentiated business model, focus on IP and platforms, high dividend yield, quality balance sheet, high RoE and no equity dilution for the past several years. Given the company’s platform focus, investments made in IP and S&M, decent cash generation and reasonable valuation, coupled with healthy growth, we envisage enough legroom for further upside, despite the strong stock performance over the past year. We maintain our BUY recommendation on the stock with an unchanged Target Price of Rs420.
Consolidated Net Revenue 8,356 8,440 (1.0) 6,258 33.5
EBITDA 884 998 (11.4) 635 39.2
EBIT 844 969 (12.8) 606 39.4
PBT 912 911 0.2 715 27.6
APAT 644 639 0.8 548 17.5
RPAT 654 639 2.2 548 19.2
Source: Company, RSec Research
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BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
2
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Conference Call – Key Highlights f Debtors rose substantially to Rs8.1bn in 4QFY19 as against <Rs4bn in 4QFY18 owing to
significant billing of >Rs1bn in the domestic distribution business (DPS), against which collections were not made; subsequently, these receivables have been collected.
f Sonata added 3 new customers in 4QFY19, which is lower than its last few quarters range of 8-12.
f Digital revenue stood at 36% in 4QFY19, against 35% in 3QFY19.
f The IT firm reported 21.7% IP-led revenue in 4QFY19 (vs. 19.1% in 3QFY19); the company is targeting US$50-60mn IP-led revenue over the next 3 years.
f Sonata has completed the acquisitions of 2 MS Dynamics solutions companies during the quarter. It acquired Australia-based Scalable Data Systems (focus on MFG and Distribution verticals) and US-based Sopris Systems (focus on Engineering and Construction verticals) in Dec’18.
f While SDS was consolidated for the full quarter, Sopris Systems was consolidated for the half quarter.
f Sonata’s subsidiary IBIS reported US$0.9mn revenue and 15% margin in 4QFY19 (US$1.3mn and 9.5% in 3QFY190; Sonata is merging the company with itself.
f Management believes steady-state EBITDA margin for the IITS business is 22-23%.
f Sonata will award wage hikes in 2 tranches i.e. July 1, 2019 and October 1, 2019.
f The Management pegs effective tax rate at 28% for FY20E.
Key Risks
f Client-specific issues in any of the top-10 clients could impact revenue growth.
f Growth pangs in IMS business, given disruptive impact of cloud revenue replacing on-premise revenue.
f Event-specific risks could impact IT budgets, cut discretionary spend and delay new deals.
f Cost escalation could impact project delivery and margin.
Total Shareholders' Funds 6,533 7,683 9,233 10,876
Minority Interest (0) - - -
Total Debt 187 156 268 231
Long Term Provisions & Others 127 435 435 435
Creditors 4,323 5,873 5,541 6,033
Other Current Liabilities & Provns 1,167 1,134 946 1,029
Total Current Liabilities 5,489 7,007 6,488 7,062
TOTAL SOURCES OF FUNDS 12,336 15,281 16,424 18,605
APPLICATION OF FUNDS
Goodwill & Other Intangible Assets 908 1,774 1,774 1,774
Net Block 232 220 210 203
CWIP 3 6 6 6
Investments 685 62 62 62
Deferred Tax Assets 124 119 119 119
LT Loans & Advances, Others 848 632 632 632
Total Non Current Assets 2,799 2,813 2,803 2,796
Debtors 4,376 8,523 7,435 8,839
Cash & Bank 3,472 1,992 4,233 5,017
Liquid Investments 1,300 1,402 1,402 1,402
Other Current Assets 389 551 551 551
Total Current Assets 9,537 12,468 13,621 15,809
TOTAL APPLICATION OF FUNDS 12,336 15,281 16,424 18,605
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
7
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Cash Flow Statement
Y/E March (Rs mn) FY18 FY19 FY20E FY21E
PAT 1,925 2,493 2,813 3,157
Non-operating & EO items (98) 4 4 4
Depreciation 124 127 176 190
Working Capital Change 904 (2,629) 568 (829)
Cash Flow from Operations (a) 2,855 (5) 3,560 2,523
Capex (64) (119) (166) (183)
Investments 1,015 622 0 0
Cash Flow from Investing (b) 952 504 -166 -183
Debt Issuance/(Repaid) (215) (31) 112 (37)
Share capital Issuance 0 0 0 0
Dividend (1,146) (1,010) (1,262) (1,514)
Cash Flow from Financing (c) (1,361) (1,040) (1,150) (1,552)
NET CASH FLOW (a+b+c) 2,446 (542) 2,245 788
EO items, others (1,505) (938) (4) (4)
Closing Cash Balance 3,472 1,992 4,233 5,017
Free Cash Flow 2,792 (124) 3,395 2,339
Key Ratios
Y/E Mar FY18 FY19 FY20E FY21E
Profitability (%)EBITDA Margin 9.4 11.3 11.5 11.7
APAT Margin 7.8 8.4 8.5 8.6
RoE 31.0 35.1 33.3 31.4
RoIC or Core RoCE 18.9 21.8 20.0 22.4
RoCE 25.9 32.2 30.8 28.9
EfficiencyTax Rate (%) 26.3 29.0 28.0 29.0
Fixed Asset Turnover (x) 63.4 58.9 49.5 43.0
Inventory (days) 0 0 0 0
Debtors (days) 65 105 82 88
Payables (days) 71 82 69 68
Cash Conversion Cycle (days) -6 23 13 20
Net Debt/EBITDA (x) (2.1) (1.0) (1.5) (1.5)
Net Debt/Equity (x) (0.7) (0.4) (0.6) (0.6)
Interest Coverage (x) 45.4 95.2 113.6 131.3
Per Share Data (Rs)EPS 18.3 23.7 26.7 30.0
CEPS 19.5 24.9 28.4 31.8
DPS 9.1 8.0 10.0 12.0
BV 62.1 73.1 87.8 103.4
ValuationP/E (x) 19.4 15.0 13.3 11.8
P/BV (x) 5.7 4.9 4.0 3.4
EV/EBITDA (x) 14.7 10.5 8.7 7.5
OCF/EV (%) 8.4 (0.0) 10.8 7.8
FCF/EV (%) 8.2 (0.4) 10.3 7.2
FCFE/mkt cap (%) 7.5 (0.3) 9.1 6.3
Dividend Yield (%) 2.6 2.3 2.8 3.4
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
8
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
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Rating GuidesRating Expected absolute returns (%) over 12 monthsBUY >10%
