in-line revenue, ip-led biz continues upward trajectory
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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.
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
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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$1.3mn and 9.5% in 3QFY190; Sonata is merging the company with itself.
f Management believes steady-state EBITDA margin for the IITS business is 22-23%.
f Sonata will award wage hikes in 2 tranches i.e. July 1, 2019 and October 1, 2019.
f The Management pegs effective tax rate at 28% for FY20E.
Key Risks
f Client-specific issues in any of the top-10 clients could impact revenue growth.
f Growth pangs in IMS business, given disruptive impact of cloud revenue replacing on-premise revenue.
f Event-specific risks could impact IT budgets, cut discretionary spend and delay new deals.
f Cost escalation could impact project delivery and margin.
f Currency risk.
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
3
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Exhibit 1: Quarterly Performance (Consolidated)Particulars 4QFY19 3QFY19 QoQ (%) 4QFY18 YoY (%)
IITS Net Revenue (US$ mn) 43.5 40.8 6.6 37.4 16.3
Consolidated Net Revenue 8,356 8,440 (1.0) 6,258 33.5
Inventory Costs 5,157 5,393 (4.4) 3,740 37.9
Employee Costs 1,525 1,379 10.6 1,288 18.5
Other Operating Expenses 789 669 17.9 595 32.6
EBITDA 884 998 (11.4) 635 39.2
Depreciation 40 30 35.9 30 34.6
EBIT 844 969 (12.8) 606 39.4
Interest Cost 7 11 (33.0) 10 (27.6)
Other Income 75 -47 (258.0) 119 (37.0)
PBT 912 911 0.2 715 27.6
Tax 268 271 (1.4) 172 55.7
Minority Interest - - -6
APAT 644 639 0.8 548 17.5
E/o (adj for tax) 9 - -
RPAT 654 639 2.2 548 19.2
Source: Company, RSec Research
Exhibit 2: Margin Break UpParticulars 4QFY19 3QFY19 QoQ (bps) 4QFY18 YoY (bps)Inventory Cost % Net Revenue 61.7 63.9 (218) 59.8 196
Employee Cost % Net Revenue 18.3 16.3 191 20.6 (232)
SG&A and Other Expenses % Net Revenues 9.4 7.9 151 9.5 (7)
EBITDA Margin (%) 10.6 11.8 (124) 10.2 43
EBIT Margin (%) 10.1 11.5 (137) 9.7 43
Tax Rate (%) 29.3 29.8 (45) 24.0 529
APAT Margin (%) 7.7 7.6 14 8.8 (105)
Source: Company, RSec Research
Exhibit 3: Key AssumptionsParticulars FY18 FY19 FY20E FY21EIITS USD revenue growth (%) 18.5 12.0 14.0 12.0
USD/INR rate 64.52 69.51 70.00 70.00
IITS EBITDA margin (%) 18.6 23.5 23.0 23.0
DPS EBITDA margin (%) 3.9 4.0 4.3 4.5
Cons. EBITDA margin (%) 9.4 11.3 11.5 11.7
Source: Company, RSec Research
Exhibit 4: Actuals vs RSec, BBG consensus(4QFY19) Actuals RSec estimates % variation from RSec estimatesIITS Revenue (US$ mn) 43.5 43.7 (0.4)
Cons. Revenue (Rs mn) 8,356 7,355 13.6
Cons. EBIT (Rs mn) 844 860 (1.8)
Cons. EBIT margin (%) 10.1 11.7 (159 bps)
Cons. Net profit (Rs mn) 654 602 8.6
Source: Company, RSec Research
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
4
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Exhibit 5: Vertical break-up(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
OPD 29.0 28.0 28.0 28.0 28.0 27.0 26.0
TTL 27.0 28.0 27.0 27.0 29.0 28.0 28.0
CPG & Retail 26.0 27.0 25.0 25.0 26.0 26.0 27.0
Others 18.0 17.0 20.0 20.0 17.0 19.0 19.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, RSec Research
Exhibit 6: Vertical growth(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
OPD 7.6 (0.8) 0.0 1.1 3.4 0.6 2.7
TTL 7.3 6.6 (3.6) 1.1 11.1 0.7 6.6
CPG & Retail 20.6 6.7 (7.4) 1.1 7.6 4.3 10.7
Others 11.3 (3.0) 17.6 1.1 (12.1) 16.6 6.6
Total 11.3 2.7 0.0 1.1 3.4 4.3 6.6 Source: Company, RSec Research
Exhibit 7: Service line break-up(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
ADM 23.0 23.0 24.0 26.0 25.0 25.0 24.0
Testing 18.0 19.0 18.0 17.0 17.0 17.0 17.0
AX 19.0 20.0 19.0 18.0 20.0 20.0 22.0
ERP 5.0 4.0 5.0 4.0 4.0 4.0 4.0
IMS 17.0 17.0 19.0 17.0 16.0 16.0 16.0
BI 7.0 8.0 7.0 8.0 8.0 8.0 8.0
E-commerce 6.0 5.0 5.0 6.0 7.0 6.0 6.0
Mobility 5.0 4.0 3.0 4.0 3.0 4.0 3.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, RSec Research
Exhibit 8: Service line growth(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
ADM 11.3 2.7 4.3 9.5 (0.5) 4.3 2.4
Testing 5.5 8.5 (5.3) (4.5) 3.4 4.3 6.6
AX 24.4 8.2 (5.0) (4.2) 14.9 4.3 17.3
ERP 11.3 (17.8) 25.0 (19.1) 3.4 4.3 6.6
IMS 5.1 2.7 11.8 (9.6) (2.6) 4.3 6.6
BI (2.6) 17.4 (12.5) 15.5 3.4 4.3 6.6
E-commerce 33.6 (14.4) 0.0 21.3 20.7 (10.6) 6.6
Mobility 11.3 (17.8) (25.0) 34.8 (22.4) 39.1 (20.0)
Total 11.3 2.7 0.0 1.1 3.4 4.3 6.6 Source: Company, RSec Research
Exhibit 9: Geographic break-up(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
USA 59.0 59.0 58.0 60.0 58.0 56.0 55.0
Europe 27.0 27.0 28.0 29.0 30.0 32.0 32.0
RoW 14.0 14.0 14.0 11.0 12.0 12.0 13.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, RSec Research
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
5
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Exhibit 10: Geographic growth(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
USA 9.5 2.7 (1.7) 4.6 (0.0) 0.7 4.7
Europe 15.6 2.7 3.7 4.7 7.0 11.3 6.6
RoW 11.3 2.7 0.0 (20.6) 12.8 4.3 15.5
Total 11.3 2.7 0.0 1.1 3.4 4.3 6.6 Source: Company, RSec Research
Exhibit 11: Onsite-offshore contribution(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Onsite 45.0 45.0 41.0 44.0 42.0 42.0 43.0
Offshore 55.0 55.0 59.0 56.0 58.0 58.0 57.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, RSec Research
Exhibit 12: Onsite-offshore growth(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Onsite 16.5 2.7 (8.9) 8.5 (1.3) 4.3 9.2
Offshore 7.4 2.7 7.3 (4.1) 7.1 4.3 4.8
Total 11.3 2.7 0.0 1.1 3.4 4.3 6.6 Source: Company, RSec Research
Exhibit 13: Client contribution(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Top-5 60.0 62.0 61.0 61.0 61.0 61.0 61.0
Clients 6-10 9.0 9.0 8.0 9.0 8.0 8.0 7.0
Top-10 69.0 71.0 69.0 70.0 69.0 69.0 68.0
Clients 11-20 9.0 8.0 10.0 10.0 8.0 9.0 8.0
Top-20 78.0 79.0 79.0 80.0 77.0 78.0 76.0
Non top-20 22.0 21.0 21.0 20.0 23.0 22.0 24.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, RSec Research
Exhibit 14: Client growth(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Top-5 9.5 6.2 (1.6) 1.1 3.4 4.3 6.6
Clients 6-10 11.3 2.7 (11.1) 13.7 (8.1) 4.3 (6.7)
Top-10 9.7 5.7 (2.8) 2.5 2.0 4.3 5.1
Clients 11-20 11.3 (8.7) 25.0 1.1 (17.2) 17.4 (5.2)
Top-20 9.9 4.1 0.0 2.3 (0.4) 5.7 3.9
Non top-20 16.6 (1.9) 0.0 (3.7) 19.0 (0.2) 16.3
Total 11.3 2.7 0.0 1.1 3.4 4.3 6.6 Source: Company, RSec Research
BUYSonata SoftwareInstitutional Equity Research
Target Price: Rs420IT | India
6
CMP (Rs) 355
Upside/ (Downside) (%) 18
Bloomberg Ticker SSOF IN
Profit and Loss Statement
Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E
Net Sales 24,539 29,609 33,104 36,670
Growth (%) 3.5 20.7 11.8 10.8
Total Operating Expenses 22,230 26,253 29,312 32,384
EBITDA 2,310 3,356 3,792 4,285EBITDA (%) 9.4 11.3 11.5 11.7 EBITDA Growth (%) 20.6 45.3 13.0 13.0 Depreciation 124 127 176 190
EBIT 2,186 3,229 3,616 4,095EBIT (%) 8.9 10.9 10.9 11.2 EBIT Growth (%) 21.0 47.7 12.0 13.3 Other Income 455 273 317 377
Interest 48 34 32 31
PBT 2,592 3,467 3,901 4,442Tax (incl deferred) 682 1,006 1,092 1,288
Minority Interest (4) (4) (4) (4)
Exceptional Items 12 28 0 0
PAT 1,925 2,493 2,813 3,157PAT Growth (%) 23.2 29.5 12.8 12.3
EPS (Rs) 18.3 23.7 26.7 30.0 EPS Growth (%) 23.2 29.5 12.8 12.3
Balance Sheet
Y/E March (Rs mn) FY18 FY19 FY20E FY21E
SOURCES OF FUNDS
Share Capital - Equity 104 104 104 104
Reserves 6,429 7,579 9,129 10,773
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%
HOLD -5% to 10%
REDUCE >-5%
Date Reco CMP TP
11-Mar-19 BUY 333 420
11-Feb-19 BUY 334 420
13-Dec-18 BUY 318 420
07-Dec-18 BUY 311 420
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