RESULTS REVIEW 3QFY19 09 FEB 2019
Sonata Software
BUY
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
IP-led growth strategy Sonata delivered a good quarter, International IT services (IITS) revenue was up 4.3% QoQ (+5.0% CC) to USD 40.8mn, in-line with our est of USD 40.3mn. Growth was led by IP-led revenue (+10.7% QoQ) and continued traction in Top-5 accounts (+10.5% in 9MFY19). IITS margin expanded 779bps QoQ to 28.4% (highest ever) led by cut in high cost sub-con expenses, higher utilisation and operational efficiency. The sustainable margin range for IITS is 23-24% (9MFY19 23.8%). Total revenue stood at Rs 8.44bn, +42.3/10.1% QoQ/YoY, led by growth in Domestic Product & Services’ (DPS) rev (Rs 5.63bn, +72.8/6.2% QoQ/YoY).
IITS’s platformation strategy is to provide IT services around IPs like Rezopia, Halosys, Brick & Click and Retina. This strategy is working well and IP-led is now 19.1% of IITS rev. It has grown at a healthy 8-Qtr CQGR of 8.9% and is also aiding margin expansion. Microsoft Dynamic 365 (Cloud ERP & CRM platform) is in hyper growth phase and Sonata being the preferred development partner, is reaping benefits. Sonata also acquired Sopris and Scalable Data to enhance Dynamics 365 offerings. Growth will be led by OPD (Microsoft 365), Retail (Brick & Click Platform) and Travel (SAP Hybrid and Rezopia) verticals. We expect IITS’ USD
revenue to grow 14/11% with margin of 22.8/23.3% in FY20/21E.
We like Sonata’s IP-focussed business model, strong relationship with top-accounts, quality balance sheet (net cash of Rs 32/share, ~10% of Mcap), high RoE (~31%) and attractive dividend yield (~3%). Maintain BUY with a TP of Rs 466 based on 16x Dec 20 EPS.
Highlights of the quarter
ADM/IMS was up 4.3/4.3% QoQ. ADM/AX is driving growth (8 Qtr CQGR of 4.3/7.6%) led by Microsoft. Nine new customers were added and Top5/20 revenue grew 4.3/5.7% QoQ.
Consolidated EBITDA margin was down 65bps QoQ to 11.8% led by DPS margin (-197 bps QoQ).
In 9MFY19 total 491 employees were hired in IITS and utilisation remains at peak levels (86%). Revenue per employee stood at USD 43.6K (-0.6% QoQ).
Near-term outlook: We expect revenue growth to continue in 4Q led by integration of Sopris (USD 1mn, full Qtr) and Scalable (USD 0.5mn, one month). IITS margins will normalise and settle around 23-24%.
Financial Summary (Consolidated)
YE Mar (Rs bn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) FY17 FY18 FY19E FY20E FY21E
Net Revenue 8.44 7.67 10.1 5.93 42.3 23.71 24.54 28.02 31.30 34.17 EBITDA 1.00 0.65 53.4 0.74 34.9 1.92 2.31 3.33 3.71 4.21 APAT 0.64 0.49 29.6 0.62 2.8 1.56 1.93 2.47 2.76 3.11 Diluted EPS (Rs) 6.2 4.8 29.6 6.0 2.8 15.1 18.6 23.8 26.6 30.0 P/E (x)
22.1 18.0 14.0 12.6 11.1
EV / EBITDA (x) 16.8 13.2 9.6 8.5 7.4 RoE (%) 29.3 31.0 35.4 34.9 34.8 Source: Company, HDFC sec Inst Research
INDUSTRY IT
CMP (as on 08 Feb 2019) Rs 334
Target Price Rs 466
Nifty 10,944
Sensex 36,546
KEY STOCK DATA
Bloomberg/Reuters SSOF IN
No. of Shares (mn) 105
MCap (Rs bn) / ($ mn) 35/492
6m avg traded value (Rs mn) 90
STOCK PERFORMANCE (%)
52 Week high / low Rs 429 / 265
3M 6M 12M
Absolute (%) 1.2 6.1 14.7
Relative (%) (2.6) 9.6 8.5
SHAREHOLDING PATTERN (%)
Promoters 29.41
FIs & Local MFs 7.82
FPIs 15.22
Public & Others 47.55
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
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 2
Quarterly Consolidated Financials Snapshot Particulars 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%)
IITS Net Revenues (USD mn) 40.8 37.4 9.1 39.1 4.3
Net Revenues 8,440 7,667 10.1 5,931 42.3
Inventory Costs 5,393 5,171 4.3 3,063 76.1
Employee Costs 1,404 1,312 7.0 1,464 (4.1)
Other Operating Expenses 644 535 20.5 664 (3.0)
EBITDA 998 651 53.4 740 34.9
Depreciation 30 31 (6.1) 29 2.1
EBIT 969 619 56.4 711 36.2
Interest Cost 11 9 17.0 10 11.6
Other Income -47 65 (172.7) 167 (128.4)
PBT 911 675 34.8 869 4.8
Tax 271 182 49.0 247 9.9
Minority Interest 0 0 NM 0 NM
RPAT 639 493 29.6 622 2.8
E/o (adj for tax) 0 2 NM 0 NM
APAT 639 491 30.2 622 2.8
Source: Company, HDFC sec Inst Research
Margin Analysis Particulars 3QFY19 3QFY18 YoY (bps) 2QFY19 QoQ (bps)
Inventory Cost % Net Revenue 63.9 67.4 (353) 51.6 1,226
Employee Cost % Net Revenue 16.6 17.1 (47) 24.7 (804)
SG&A and Other Expenses % Net Revenues 7.6 7.0 66 11.2 (357)
EBITDA Margin (%) 11.8 8.5 334 12.5 (65)
EBIT Margin (%) 11.5 8.1 340 12.0 (51)
Tax Rate (%) 29.8 27.0 283 28.4 138
APAT Margin (%) 7.6 6.4 117 10.5 (291)
Source: Company, HDFC sec Inst Research
IITS’ revenue grew 3.2% QoQ to Rs 2.84bn and DPS revenue grew 6.2% YoY to Rs 5.63bn in INR terms IITS’ EBITDA margin expanded 779 bps to 28.4% led by cost rationalisation and higher utilization, but will normalize in the coming quarter. Some high cost sub-contracting expenses were not there in the quarter leading to 4.1% fall in employee expenses Other income was down due to forex loss of Rs 0.06bn APAT stood at Rs 0.64bn up 2.8% QoQ (vs. our exp of Rs 0.64bn), beat stabilised at PAT level led by loss of Rs 47mn in other income (vs. gain of Rs 167mn in 2Q) Tax rate will remain the range of 27-28% for FY19-20E
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 3
Segmental Revenue & EBITDA Mix Particulars (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) 9MFY19 9MFY18 YoY (%)
IITS Net Revenues 2,840 2,408 17.9 2,753 3.2 8,164 6,867 18.9
DPS Revenue 5,632 5,303 6.2 3,259 72.8 13,262 11,581 14.5
Inter segment (32) (44) NM (81) NM (173) (167) NM
Total Revenue# 8,440 7,667 10.1 5,931 42.3 21,254 18,281 16.3
EBITDA (Rs mn) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) 9MFY19 9MFY18 YoY (%)
IITS * 807 503 60.6 568 42.1 1,945 1,250 55.6
DPS 195 154 26.6 177 10.2 539 445 21.1
Inter segment (4) (6)
(5)
(13) (21)
Total EBITDA 998 651 53.4 740 34.9 2,472 1,674 47.6
EBITDA Margin (%) 3QFY19 3QFY18 YoY (%) 2QFY19 QoQ (%) 9MFY19 9MFY18 YoY (%)
IITS 28.4 20.9 755 20.6 779 23.8 18.2 562
DPS 3.5 2.9 56 5.4 (197) 4.1 3.8 22
Total EBITDA Margin (%) 11.8 8.5 334 12.5 (65) 11.6 9.2 247
Source: Company, HDFC sec Inst Research, *IITS EBITDA excludes other income and income tax refunds, # Reported revenue
IITS Vertical Revenue Mix (% Contribution) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
OPD 30.0% 29.0% 28.0% 28.0% 28.0% 28.0% 27.0%
TTL 28.0% 27.0% 28.0% 27.0% 27.0% 29.0% 28.0%
CPG & Retail 24.0% 26.0% 27.0% 25.0% 25.0% 26.0% 26.0%
Others 18.0% 18.0% 17.0% 20.0% 20.0% 17.0% 19.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, HDFC Sec Inst Research
IITS Vertical-wise Revenue Growth (Growth % QoQ; USD) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
OPD 10.2% 7.7% -0.9% 0.0% 1.1% 3.4% 0.6%
TTL 10.5% 7.4% 6.5% -3.6% 1.1% 11.1% 0.7%
CPG & Retail -1.7% 20.7% 6.6% -7.4% 1.1% 7.6% 4.3%
Others 6.5% 11.4% -3.0% 17.6% 1.1% -12.1% 16.6%
Total 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% 4.3%
Source: Company, HDFC Sec Inst Research
DPS business is lumpy in nature due to closure of some large deal in a particular quarter. The best way to measure its performance is on absolute EBITDA basis, which was up 10.2% QoQ IITS EBITDA expanded in the quarter but in 9M also the improvement has been significant (+562bps). The benefits of IP-led shift and cost rationalisation is reflecting in margins OPD/Travel/Retail has grown at an eight quarter CQGR of 2.4/4.8/3.3% respectively The number of clients in the others bracket is down from 39 to 27 which has led to some cost saving reflecting in IITS margins Out of the total 112 customers 54/19/12 are in Retail/OPD/Travel respectively
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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IITS Service Line Break-up (% Contribution) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
ADM 23.0% 23.0% 23.0% 24.0% 26.0% 25.0% 25.0%
Testing 19.0% 18.0% 19.0% 18.0% 17.0% 17.0% 17.0%
IMS 18.0% 17.0% 17.0% 19.0% 17.0% 16.0% 16.0%
AX 17.0% 19.0% 20.0% 19.0% 18.0% 20.0% 20.0%
BI 8.0% 7.0% 8.0% 7.0% 8.0% 8.0% 8.0%
E-commerce 5.0% 6.0% 5.0% 5.0% 6.0% 7.0% 6.0%
ERP 5.0% 5.0% 4.0% 4.5% 4.0% 4.0% 4.0%
Rezopia/Mobility/Cloud 5.0% 5.0% 4.0% 3.5% 4.0% 3.0% 4.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, HDFC Sec Inst Research
IITS Service Line Growth (Growth %, QoQ) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
ADM -2.0% 11.4% 2.7% 4.3% 9.5% -0.5% 4.3%
Testing 19.0% 5.5% 8.4% -5.3% -4.5% 3.4% 4.3%
IMS 0.9% 5.2% 2.7% 11.8% -9.6% -2.6% 4.3%
AX 20.7% 24.5% 8.1% -5.0% -4.2% 14.9% 4.3%
BI 6.5% -2.5% 17.3% -12.5% 15.5% 3.4% 4.3%
E-commerce -11.2% 33.7% -14.4% 0.0% 21.3% 20.7% -10.6%
ERP 6.5% 11.4% -17.9% 12.5% -10.2% 3.4% 4.3%
Rezopia 6.5% 11.4% -17.9% -12.5% 15.5% -22.4% 39.1%
Total 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% 4.3%
Source: Company, HDFC Sec Inst Research
IMS revenue has declined due to shift to cloud, but is nearing bottom ADM/Testing has grown at an 8 Qtr CQGR of 4.3/3.8% led by Top-5 clients Microsoft Dynamics AX has growth at an 8-quarter CQGR of 7.6% (company average is 3.8%) Among IPs, Rezopia, Halosys and Brick and Click are witnessing increased traction Cloud migration, front end development and Analytics engine is a significant part of Digital revenue
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 5
IITS Geographic Revenue Mix (% Contribution) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
USA 60.0% 59.0% 59.0% 58.0% 60.0% 58.0% 56.0%
Europe 26.0% 27.0% 27.0% 28.0% 29.0% 30.0% 32.0%
RoW 14.0% 14.0% 14.0% 14.0% 11.0% 12.0% 12.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, HDFC Sec Inst Research
IITS Geographic Revenue Growth (% QoQ) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
USA 6.5% 9.5% 2.7% -1.7% 4.6% 0.0% 0.7%
Europe 15.4% 15.7% 2.7% 3.7% 4.7% 7.0% 11.3%
RoW -6.8% 11.4% 2.7% 0.0% -20.6% 12.8% 4.3%
Total 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% 4.3%
Source: Company, HDFC Sec Inst Research
IITS Onsite-Offshore Split IT services revenue break-up (%) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
Offshore 57.0% 55.0% 55.0% 59.0% 56.0% 58.0% 58.0%
Onsite 43.0% 45.0% 45.0% 41.0% 44.0% 42.0% 42.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, HDFC Sec Inst Research
IITS Onsite-Offshore Growth IT services revenue growth (% QoQ) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
Offshore 6.5% 7.5% 2.7% 7.3% -4.1% 7.1% 4.3%
Onsite 6.5% 16.6% 2.7% -8.9% 8.5% -1.3% 4.3%
Total 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% 4.3%
Source: Company, HDFC Sec Inst Research
Europe is seeing significant traction led by Travel and Microsoft ISV center, focus is to grow US revenue which is a bigger market Onsite/Offshore revenue mixed remained stable in the quarter, off-shoring is a margin lever
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 6
IITS Client Concentration Client concentration (%) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
Top 5 61.0% 60.0% 62.0% 61.0% 61.0% 61.0% 61.0%
Top-10 70.0% 69.0% 71.0% 69.0% 70.0% 69.0% 69.0%
Non-top 10 30.0% 31.0% 29.0% 31.0% 30.0% 31.0% 31.0%
Top 20 79.0% 78.0% 79.0% 79.0% 80.0% 77.0% 78.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, HDFC Sec Inst Research
IITS Client Concentration Growth Client concentration (% growth) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
Top 5 10.1% 9.6% 6.1% -1.6% 1.1% 3.4% 4.3%
Top-10 6.5% 9.8% 5.6% -2.8% 2.5% 2.0% 4.3%
Non-top 10 6.5% 15.1% -4.0% 6.9% -2.2% 6.9% 4.3%
Top 20 3.9% 10.0% 4.0% 0.0% 2.3% -0.4% 5.7%
Total 6.5% 11.4% 2.7% 0.0% 1.1% 3.4% 4.3%
Source: Company, HDFC Sec Inst Research
Top 5/10 clients grew strongly for the second consecutive quarter, added 9 new clients in the quarter High client concentration is a risk, but there is enough scope to grow increase wallet share in Top-5 accounts
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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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 growth at a CQGR of 4.1/9.4% over the last eight quarter IITS EBITDA margin will be in the range of 23-24%. In 9M IITS margin stood at 23.8% +562bps YoY Added 491 employees in the IITs business to broaden the pyramid. The company has been replacing the high cost sub-con expenses with internal talent which has led to margin expansion Average revenue per employee stood at USD 43,572 down 0.6/1.6% QoQ/YoY Debtor days is among the lowest in the industry, stable at 40-42 level
27
.4
28
.5
29
.2
31
.2
30
.3
30
.7
32
.7
36
.4
37
.4
37
.4
37
.8
39
.1
40
.8
(5)
(1)
3
7
11
15
0
5
10
15
20
25
30
35
40
45
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2QFY
18
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Revenue (USD mn) QoQ growth (RHS)
(USD mn) (%, QoQ)
42
3
32
0
34
2 41
4
39
4
32
5
33
5 41
3 50
3
479 5
70
56
8
807
9
14
19
24
29
34
50
150
250
350
450
550
650
750
850
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
EBITDA EBITDA margin (RHS)(Rs mn) (%)
2,9
08
3,1
39
3,1
11
3,14
4
3,1
47
3,1
61 3,2
13
3,4
18
3,46
4
3,29
6
3,3
13 3,4
54 3,
679 3,8
12
2,500
2,700
2,900
3,100
3,300
3,500
3,700
3,900
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Nos
60
52 55
60 60
48
52
47
40 39 40 41 4
2
40
0
10
20
30
40
50
60
70
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Days
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 8
DPS Quarterly Revenue Trend DPS EBITDA Margin Trend
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 3.4% over the last eight quarter DPS’ debtors days has come down to 42 led by efficient collections and higher cloud license sales
2,3
16
3,43
8
3,55
6
4,8
93
2,95
5
4,1
57
4,8
61
4,2
81
1,99
7
5,3
03
3,8
87
4,3
71
3,25
9
5,6
32
0
1,000
2,000
3,000
4,000
5,000
6,000
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
(Rs mn)
13
2 15
0
149
14
2
142 14
9
14
1
151
14
0 15
4
158 16
7 17
7 19
5
0
1
2
3
4
5
6
7
8
50
70
90
110
130
150
170
190
210
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2QFY
17
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
EBITDA EBITDA margin (RHS)
(Rs mn) (%)
14
2
14
0
14
8
14
7
156
15
3 153
15
7
16
4
16
3
16
3
16
1
15
7
15
5
125
130
135
140
145
150
155
160
165
170
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
1QFY
19
2QFY
19
3QFY
19
(Nos)
10
1
65
62 6
9
110
95
76
81
59
38
49
55
48
42
0
20
40
60
80
100
120
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2QFY
17
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
2Q
FY1
8
3Q
FY1
8
4Q
FY1
8
1Q
FY1
9
2Q
FY1
9
3Q
FY1
9
Days
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 9
IITS’ Segment Estimates IITS (Rs million) FY17 FY18 FY19E FY20E FY21E
Revenue (USD million) 121.4 143.9 160.5 182.8 203.5
% Growth 12.6 18.6 11.5 13.9 11.3
Revenue 8,218 9,285 11,206 13,160 14,651
% Growth 16.3 13.0 20.7 17.4 11.3
EBITDA 1,438 1,730 2,645 2,995 3,414
EBITDA Margin (%) 17.5 18.6 23.6 22.8 23.3
Source: Company, HDFC sec Inst Research
DPS’ Segment Estimates DPS (Rs million) FY17 FY18 FY19E FY20E FY20E
Revenue 15,774 15,468 17,149 18,514 19,926
% Growth 26.2 (1.9) 10.9 8.0 7.6
EBITDA 583 603 714 755 833
EBITDA Margin (%) 3.7 3.9 4.2 4.1 4.2
Source: Company, HDFC sec Inst Research
Change In Estimates Particulars Earlier estimates Revised estimates % change
FY20E
Revenue (Rs mn) 30,318 31,299 3.2
EBITDA (Rs mn) 3,338 3,713 11.2
EBITDA margin (%) 11.0 11.9 85 bps
APAT 2,621 2,756 5.2
FY21E
Revenue (Rs mn) 33,080 34,167 3.3
EBITDA (Rs mn) 3,732 4,205 12.7
EBITDA margin (%) 11.3 12.3 103 bps
APAT 2,915 3,113 6.8
Source: Company, HDFC sec Inst Research
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
Page | 10
Peer Set Comparison
Company Mcap
(Rs bn)
CMP (Rs)
Rating TP
(Rs)
EPS (Rs) P/E (x) RoE (%)
FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E
LTI 319 1841 BUY 2,240 67.0 87.4 92.2 105.9 27.5 21.1 20.0 17.4 33.2 35.3 30.7 29.6
Mphasis 189 1020 BUY 1,390 45.4 58.1 68.2 81.5 22.5 17.6 15.0 12.5 14.6 20.5 23.3 24.1
LTT 162 1557 BUY 2,030 45.7 66.5 75.3 97.7 34.1 23.4 20.7 15.9 27.7 31.9 29.8 31.8
Mindtree 147 892 BUY 1140 30.5 44.3 52.5 59.0 29.2 20.1 17.0 15.1 20.5 25.5 25.1 24.3
Hexaware * 106 356 BUY 470 16.8 19.6 22.8 26.2 21.2 18.2 15.6 13.6 26.6 26.5 26.9 27.3
Cyient 68 606 BUY 790 38.6 39.2 45.5 50.7 15.7 15.5 13.3 12.0 18.1 17.9 18.9 19.0
Tata Elxsi 56 905 NR 1145 38.5 46.9 51.3 61.1 23.5 19.3 17.6 14.8 37.0 35.1 31.1 30.4
Persistent 51 636 BUY 815 40.4 44.9 51.8 59.8 15.7 14.2 12.3 10.6 16.0 16.0 16.8 17.0
Zensar 50 223 BUY 300 10.6 13.4 16.7 19.5 21.0 16.6 13.4 11.4 15.1 16.8 18.1 18.3
eClerx 39 1010 NEU 1035 70.8 58.7 71.9 80.9 14.3 17.2 14.0 12.5 22.4 18.3 21.1 22.2
Sonata 35 334 BUY 466 18.6 23.8 26.6 30.0 18.0 14.1 12.6 11.1 31.0 35.4 34.9 34.8
Intellect 23 175 BUY 300 3.7 7.5 11.7 16.7 47.3 23.3 15.0 10.5 NM 10.3 14.0 17.1
Majesco 14 483 BUY 761 -2.1 29.3 39.5 49.4 NM 16.5 12.2 9.8 NM 14.7 18.5 22.4
Midcap Average
24.2 18.2 15.3 12.9 23.8 23.4 23.8 24.5
Source: HDFC sec Inst Research * YE Dec, NR - Not Rated
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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Consolidated Income Statement YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E
IITS USD Revenue (mn) 121.4 143.9 160.5 182.8 203.5
Growth (%) 12.6 18.6 11.5 13.9 11.3
Net Revenues 23.71 24.54 28.02 31.30 34.17
Growth (%) 22.2 3.5 14.2 11.7 9.2
Total Operating Expenses 21.79 22.23 24.69 27.59 29.96
EBITDA 1.92 2.31 3.33 3.71 4.21
EBITDA (%) 8.1 9.4 11.9 11.9 12.3
EBITDA Growth (%) (0.2) 20.6 44.0 11.6 13.3
Depreciation 0.11 0.12 0.17 0.19 0.22
EBIT 1.81 2.19 3.15 3.52 3.99
Other Income 0.55 0.47 0.33 0.34 0.38
Interest 0.09 0.05 0.04 0.04 0.04
PBT 2.26 2.60 3.44 3.82 4.32
Tax (incl deferred) 0.69 0.68 0.98 1.07 1.21
Minority Int. and associate profit -0.01 0.00 0.00 0.00 0.00
RPAT 1.56 1.93 2.47 2.76 3.11
EO (Loss) / Profit (Net Of Tax) 0.08 0.01 0.02 0.00 0.00
APAT 1.49 1.91 2.45 2.76 3.11
APAT Growth (%) (4.1) 28.8 27.9 12.6 13.0
EPS 15.1 18.6 23.8 26.6 30.0
EPS Growth (%) (1.4) 23.2 28.1 11.8 13.0
Source: Company, HDFC sec Inst Research
Consolidated Balance Sheet YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E
SOURCES OF FUNDS
Share Capital - Equity 0.10 0.10 0.10 0.10 0.10
Reserves 5.80 6.43 7.30 8.28 9.38
Total Shareholders' Funds 5.90 6.53 7.41 8.38 9.49
Minority Interest 0.00 (0.00) 0.00 0.00 0.00
Total Debt 0.35 0.19 0.19 0.19 0.19
Net Deferred Taxes (0.05) (0.12) (0.12) (0.12) (0.12)
Long-term Provisions & Others 0.14 0.13 0.13 0.13 0.13
TOTAL SOURCES OF FUNDS 6.36 6.72 7.60 8.57 9.68
APPLICATION OF FUNDS
Net Block 0.38 0.33 1.00 1.12 1.24
CWIP 0.00 0.00 0.00 0.00 0.00
Goodwill & Other Intangible Assets 0.80 0.81 0.81 0.81 0.81
Investments 0.00 0.00 0.00 0.00 0.00
LT Loans & Advances, Others 0.80 0.85 0.96 1.10 1.25
Total Non Current Assets 1.99 1.99 2.78 3.03 3.30
Inventories 0.00 0.00 0.00 0.00 0.00
Debtors 5.20 3.96 5.37 6.00 6.55
Cash & Equivalents 3.81 5.46 3.86 4.37 4.97
Other Current Assets 0.93 0.80 0.88 0.97 1.07
Total Current Assets 9.94 10.22 10.11 11.34 12.59
Creditors 4.48 4.32 4.06 4.53 4.93
Other Current Liabilities & Provns 1.09 1.17 1.23 1.26 1.29
Total Current Liabilities 5.58 5.49 5.29 5.80 6.21
Net Current Assets 4.37 4.73 4.82 5.55 6.38
TOTAL APPLICATION OF FUNDS 6.36 6.72 7.60 8.57 9.68
Source: Company, HDFC sec Inst Research
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Consolidated Cash Flow YE March (Rs bn) FY17 FY18 FY19E FY20E FY21E
Reported PBT 2.26 2.60 3.44 3.82 4.32
Non-operating & EO items (0.48) (0.45) (0.30) (0.34) (0.37)
Interest expenses 0.09 0.05 0.04 0.04 0.04
Depreciation 0.11 0.12 0.17 0.19 0.22
Working Capital Change (0.78) 1.13 (1.85) (0.35) (0.38)
Tax paid (0.69) (0.68) (0.98) (1.07) (1.21)
OPERATING CASH FLOW ( a ) 0.52 2.78 0.51 2.30 2.62
Capex (0.09) (0.08) (0.84) (0.31) (0.34)
Free cash flow (FCF) 0.43 2.70 (0.33) 1.99 2.28
Investments 0.00 0.00 0.00 0.00 0.00
Non-operating income 0.47 0.45 0.31 0.34 0.38
INVESTING CASH FLOW ( b ) 0.38 0.38 (0.53) 0.03 0.04
Debt Issuance (1.36) (0.17) 0.00 0.00 0.00
Interest expenses (0.09) (0.05) (0.04) (0.04) (0.04)
FCFE (1.02) 2.49 (0.37) 1.95 2.23
Share capital Issuance (0.00) 0.00 0.00 0.00 0.00
Dividend (1.13) (1.28) (1.59) (1.78) (2.01)
FINANCING CASH FLOW ( c ) (2.58) (1.49) (1.63) (1.82) (2.05)
NET CASH FLOW (a+b+c) (1.68) 1.66 (1.65) 0.51 0.60
Non-operating and EO items 0.60 0.01 (0.02) 0.00 0.00
Closing Cash & Equivalents 3.86 5.53 3.86 4.37 4.97
Source: Company, HDFC sec Inst Research
Key Ratios FY17 FY18 FY19E FY20E FY21E
PROFITABILITY (%)
EBITDA Margin 8.1 9.4 11.9 11.9 12.3
APAT Margin 6.6 7.8 8.8 8.8 9.1
RoE 29.3 31.0 35.4 34.9 34.8
RoIC or Core RoCE 48.4 127.2 60.4 60.3 61.0
RoCE 19.1 24.6 31.5 31.3 31.4
EFFICIENCY
Tax Rate (%) 31.7 26.3 28.5 28.0 28.0
Fixed Asset Turnover (x) 17.3 17.0 12.3 12.1 11.6
Inventory (days) 0 0 0 0 0
Debtors (days) 80 59 70 70 70
Other Current Assets (days) 14 12 11 11 11
Payables (days) 75 71 60 60 60
Other Current Liab & Provns (days) 17 17 16 15 14
Cash Conversion Cycle (days) 3 -17 5 7 8
Net Debt/EBITDA (x) (1.8) (2.3) (1.1) (1.1) (1.1)
Net Debt/Equity (x) (0.6) (0.8) (0.5) (0.5) (0.5)
Interest Coverage (x) 19.5 45.5 84.4 85.6 88.9
PER SHARE DATA
EPS (Rs/sh) 15.1 18.6 23.8 26.6 30.0
CEPS (Rs/sh) 16.1 19.7 25.4 28.4 32.1
DPS (Rs/sh) 9.3 10.5 13.1 14.6 16.5
BV (Rs/sh) 56.9 63.0 71.4 80.8 91.4
VALUATION
P/E 22.1 18.0 14.0 12.6 11.1
P/BV 5.9 5.3 4.7 4.1 3.6
EV/EBITDA 16.8 13.2 9.6 8.5 7.4
OCF/EV (%) 1.6 9.1 1.6 7.3 8.5
FCF/EV (%) 1.3 8.9 (1.0) 6.3 7.4
FCFE/mkt cap (%) (3.0) 7.2 (1.1) 5.6 6.4
Dividend Yield (%) 2.8 3.1 3.9 4.4 4.9
Source: Company, HDFC sec Inst Research
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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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
Date CMP Reco Target
8-Feb-18 291 BUY 335
12-Apr-18 333 BUY 375
23-May-18 338 BUY 380
6-Jul-18 284 BUY 380
16-Aug-18 327 BUY 375
10-Oct-18 334 BUY 421
5-Nov-18 313 BUY 445
30-Nov-18 305 BUY 445
8-Jan-19 308 BUY 440
9-Feb-19 334 BUY 466
RECOMMENDATION HISTORY
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Sonata Software TP
SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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Disclosure: We, Amit Chandra, MBA, Apurva Prasad, MBA & Akshay Ramnani, CA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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SONATA SOFTWARE: RESULTS REVIEW 3QFY19
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