Focus on the big deal, AI is crucial for Sonata amid short-term hiccups

ET Intelligence Group: The stock of Sonata Software, a mid-tier IT company, has fallen 18% so far in August, as delays in major deals dampened the company’s June quarter performance. While it is likely to face challenges in the current quarter as well, Sonata is expected to post better numbers in the second half of the current fiscal given a strong order book.

Given the slow pace in the first half of the year, analysts have cut earnings growth estimates for the full year.

Sonata provides solutions to modernize the technology infrastructure used by customers across verticals including banking, financial services and insurance (BFSI), healthcare, retail, manufacturing, travel, media and telecom. For international business, the company has high client concentration with the top 10 clients accounting for half of the segment’s revenue.

Domestic business revenue accounted for about 57% of total revenue in FY24; This increased to 64% in the June 2024 quarter as overseas revenue growth slowed during the quarter.

Total revenue for the June quarter, led by Indian operations, rose 15.3% sequentially to Rs. 2,527.4 crore as revenue from its international services business grew at a slower pace of 1.3% to $82.7 million. The company’s operating margin before depreciation and interest (EBITDA margin) improved by 40 basis points to 7%, respectively. Consolidated net profit fell 4.3% to Rs 105.6 crore due to lower other income.

The company had previously guided for revenue of $1.5 billion by FY26, compared with $1 billion in FY24 with EBITDA margins in the low 20s. However, the target timeframe is likely to be extended to FY27 due to the current phase of delays in project ramp up.

In an analyst call after the quarterly results, company management said deal decisions by clients and project completions in the UK, Europe and retail manufacturing will slow in the coming quarter. In addition, the large healthcare deal won during the June quarter will be margin dilutive for the first two to three quarters due to upfront investment in artificial intelligence (AI) related technologies. The company expects 20% of revenue from AI-related projects over the next three years.

The company closed three major deals in the June quarter. It has another 49 such deals in the pipeline.

Given near-term challenges like margin dilution and rising finance costs, IDBI Capital Markets & Securities has cut its earnings per share (EPS) estimate for FY25 by 10%. Brokerage Rs. Downgraded the stock rating from “Buy” to “Hold” while maintaining a target price of 770, implying FY26 price-earnings multiple of 28. On the BSE on Wednesday, the stock rose 3.4% to Rs. was closed at 603.3.