March 2, 2023
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SONATA SOFTWARE, Aiming to reach, half a billion-dollar IT services revenues by FY26/27, acquires Quant systems
Call & Research Report by ICICI Securities
Sector: IT Services & Consulting
CMP Rs. 706, Target Rs. 835 (18% upside potential)
Target Period: 12 Months
Sonata Software (Sonata) offers IT services (30%) and product licensing & deployment (70%).
● The company provides IT services to travel, retail, agri & commodities and manufacturing and software vendors
● Net debt free and healthy double digit return ratio (with RoCE of >30%)
Key Highlights:
● Sonata’s wholly owned US subsidiary signed a definitive agreement to acquire 100% stake in US based Quant Systems (QS) for total consideration of US$ 160 mn (4.3x sales), US$65 mn to be paid upfront while rest US$95mn to be paid in next 2 years based on certain milestones.
● The acquisition is in line with Sonata’a strategy to accelerate IT services growth from hereon as well as strengthening its offering in BFSI and Healthcare vertical
● Quant Systems’s revenue grew 4x in last 2 years and growth going forward is also expected to be strong. EBITDA margins for the company are also healthy i.e., upwards of 30%.
What should investors do? Sonata’s share price has grown by ~3x over the past five years (from ~Rs 238 in February 2018 to ~Rs 706 levels in February 2023).
● We maintain our BUY rating on the stock
Target Price and Valuation: We value Sonata at Rs 835 i.e., 18x P/E on FY25E EPS.
Key triggers for future price performance:
● Acquisition of QS will strengthen Sonata offering in BFSI and Healthcare & Life science verticals which will aid the revenue growth of company
● It will also help in commanding better pricing as Quant Systems led data analytics, data engineering is already commanding premium billing rates
● Winning large deals and strong digital spending by the clients prompt us to build IT service dollar revenue growth of over 23.8% CAGR over FY22-25E
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