Sonata Software. Strong growth, reasonable valuations. Source: Company Data; PL Research

Transcription

1 Strong growth, reasonable valuations August 16, 2017 Madhu Babu Rating BUY Price Rs160 Target Price Rs200 Implied Upside 25.0% Sensex 31,771 Nifty 9,897 (Prices as on August 16, 2017) Trading data Market Cap. (Rs bn) 16.8 Shares o/s (m) M Avg. Daily value (Rs m) 47.3 Major shareholders Promoters 32.29% Foreign 12.93% Domestic Inst. 2.15% Public & Other 52.63% Stock Performance (%) 1M 6M 12M Absolute (0.3) (15.4) 5.6 Relative 0.4 (28.2) (7.3) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: SOFT.BO, BB: SSOF IN) (Rs) Aug 16 Oct 16 Source: Bloomberg Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Sonata Software results were a mixed bag with strong IT services revenue growth negated by weak IT services adjusted EBIDTA margin. Higher other income led to PAT beat our estimates by 9% for the quarter. IT services USD revenues came at USD32.7mn up 6.5% QoQ and above our estimates (PLe: USD31.9mn). Traction in top accounts aided growth for the quarter. Revenues from top 5 accounts stood at USD20mn up 10% QoQ and accounted to 61% of total revenues. Headcount of the company came at 3575 employees with net addition of 209 employees during the quarter. We note that headcount of company increased by 6% QoQ which indicates robust momentum in the IT services business. IT services adjusted EBIDTA margin came at 16.1% down 190bps QoQ and below our estimates (PLe: 17.3%). Consolidated EBIDTA/PAT came at Rs477/431mn for 4QFY17 (vs. PLe: Rs542/395mn). Led by strong 1Q, we upgrade Sonata Software s IT services USD revenues to grow by 13.6/13.6% for FY18/FY19E (vs 10/12.8% modelled earlier). We believe that Sonata s strong investments in Platforms and IP led strategy is yielding benefits with company showing strong momentum in focused verticals. We note Sonata Software IT services business can reach USD157mn by FY19E (vs. USD121.4mn in FY17) growing by 13.6%CAGR (FY17 FY19E). Our EPS estimates are Rs15.7/17.5 for FY18/FY19E (vs Rs15.4/17.5 modelled earlier). Stock currently trades at cheap valuations of 9.2x FY19E.Company has strong 6% dividend yield. Net cash on balance sheet stands at Rs3570mn as on 1QFY18. This represents Rs 34/sh which is 21% of Mcap (Of this Rs700mn would have gone out for final dividend payment in 2QFY18). Steady revenue growth, Strong balance sheet and superior dividend yield coupled with cheap valuations can help the stock. We retain BUY rating with TP retained Rs200/sh (11.5x FY19E EPS). We have recently initiated coverage on the stock. (Click on the Link for Detailed Report) Key financials (Y/e March) E 2019E Revenues (Rs m) 19,404 25,211 26,273 30,100 Growth (%) EBITDA (Rs m) 1,919 1,923 2,155 2,517 PAT (Rs m) 1,513 1,538 1,640 1,843 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2019E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Q1FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Quarterly P&L :1QFY18: IT services Revenues beat estimates but EBIDTA Margin miss (Rs m) Q1FY18 Q4FY17 QoQ Q1FY17 YoY PL Est Var (Act vs Ple) IT services Revenues (US$ m) % % % IT Services Revenues % % % IT products Revenues % % % Total consol Revenues % % % Consol EBITDA % % % EBITDA Margins 7.4% 6.2% 122 bps 6.4% 98 bps 7.8% 42 bps PBT % % % Tax expense Tax rate 27.7% 28.7% 29.5% 31.0% PAT % % % EPS (Rs) % % % Consolidated revenues at Rs6453mn were down 10% QoQ and below our estimates (PLe: Rs6969mn) led by lower IT product revenues. IT products business revenues at Rs4341mn were down 15% QoQ. IT services revenue came at Rs2112mn up 3.5% QoQ for the quarter. Consolidated EBIDTA margin came at 7.5% up 130bps QoQ led by higher mix of IT services revenues (PLe: 7.8%). However, consolidated absolute EBIDTA came at Rs477mn which is 12% below our estimates. Consolidated EBIDTA/PAT came at Rs477/431mn for 4QFY17 (vs. PLe: Rs542/395mn). Consolidated PAT was 9% above our estimates led by higher other income. IT services shows strong momentum: IT services revenues came at USD32.7mn up 6.5% QoQ and above our estimates (USD31.9mn) mainly aided by growth in existing accounts and Microsoft alliance. Among verticals, OPD business (up 10.2% QoQ) and Travel (up 10.4% QoQ) aided in strong revenue beat. This is the second consecutive quarter of good growth in travel business. Sonata has been recently recognized as the preferred partner for Microsoft to ISV s and Enterprises developing Products on the Microsoft Stack. We believe that this recognition from Microsoft will substantially boost Sonata Software s brand and aid in generating new business from the Microsoft Stack. August 16,

3 Exhibit 2: IT Services USD revenues ( USD mn) Exhibit 3: IT services revenues growth QoQ 8.0% 6.0% 4.0% 2.0% 0.0% 7.4% 5.2% 2.9% 3.6% 0.0% 0.4% 5.4% 4.0% 2.5% 6.8% 1.3% 6.5% 2.0% 4.0% 2.9% 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Margins below our estimates: Consolidated EBIDTA margin stood at 7.5%, up 130bps QoQ and below our estimate (PLe: 8.8%). Lower proportion of IT products business (67.2% of revenues in 1QFY18 vs. 71.5% in 4QFY17) has also led to consolidated EBIDTA margin to expand for the quarter. IT services Adjusted EBIDTA margin came in at 16.1%, down 190bps QoQ. We believe that INR appreciation and strong hiring during the quarter would have weighed on margins for the quarter. Adjusted EBIDTA margin for IT products came at 3.3% up 160bps QoQ. Sonata Software includes other income and forex gain in its reported segmental EBIDTA margin of IT services business. If we exclude these two, we get the actual adjusted EBIDTA margin of IT services business. We note that Adjusted EBIDTA margin came in at 16.1% for 1QFY18, down 190bps QoQ and below our estimates. August 16,

4 Exhibit 4: Adjusted IT services EBITDA Margins Adjusted EBIDTA margin (IT services) Average Exchange Rate (RHS) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 21.7% 20.3% 21.7% 21.6% 20.1% 23.3% 18.7% 18.4% 16.7% 15.2% 17.4% 18.0% 16.1% 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY Valuation and View Exhibit 5: Sonata one year forward PE chart (9.7X one year forward) Exhibit 6: Sonata one year forward PE discount/premium to mindtree Aug 13 Dec 13 Apr 14 Aug 14 Dec 14 Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17 Aug % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% P/E Mean + Std Dev Mean Mean Std Dev Aug 13 Dec 13 Apr 14 Aug 14 Dec 14 Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17 Aug 17 August 16,

5 Key Metrics Exhibit 7: Headcount metrics Headcount 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 IT Services Products Total Net additions Exhibit 8: Revenue by delivery centre for IT services business 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Onsite 36% 32% 30% 33% 34% 38% 42% 43% 42% 45% 40% 43% 43% Offshore 64% 68% 70% 67% 66% 62% 58% 57% 58% 55% 60% 57% 57% Exhibit 9: Vertical mix of revenues (%) for IT services business Vertical Mix of Revenues 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 OPD Travel CPG Others Exhibit 10: Revenues by verticals (in USD mn) and QoQ growth Fig in USD mn 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 OPD QoQ Growth/(Decline) 2.9% 4.6% 2.9% 8.5% 1.4% 0.4% 9.8% 10.4% 6.0% 2.1% 10.2% Travel QoQ Growth/(Decline) 14.3% 14.0% 3.0% 2.8% 12.2% 2.3% 4.2% 3.2% 9.8% 5.2% 10.5% CPG QoQ Growth/(Decline) 9.3% 14.7% 14.3% 19.2% 16.5% 18.9% 2.5% 2.4% 14.0% 2.4% 1.7% Others QoQ Growth/(Decline) 7.9% 3.6% 5.9% 6.0% 5.7% 4.0% 2.5% 6.8% 2.9% 7.3% 6.5% August 16,

6 Exhibit 11: Service mix of revenues (%) for IT services business 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 ADM Test AX ERP IMS BI E commerce Mobility Cloud Exhibit 12: Revenues from top 10 clients for IT services business 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Client Concentration August 16,

7 Exhibit 13: Consolidated financial summary of Sonata Software FY14 FY15 FY16 FY17 FY18E FY19E USD revenues of IT services ( USD mn) Growth (%) 29.5% 23.0% 9.7% 12.6% 13.6% 13.6% Average Rate (USD vs INR) IT services Revenues ( Rs mn) 4,835 6,068 7, Growth (%) 44.2% 25.5% 16.5% 15.4% 11.0% 14.2% IT Products Revenues ( Rs mn) 10,847 10,926 12, Growth (%) 10.9% 0.7% 14.4% 38.7% 0.2% 14.2% Consolidated Revenues ( Rs mn) 15,659 16,821 19,404 25,211 26,273 30,100 Growth (%) 19.4% 7.4% 15.4% 29.9% 4.2% 14.6% Mix of Revenues IT Services 31% 36% 36% 32% 34% 34% Products ( Reseller of Licenses) 69% 65% 64% 69% 66% 66% EBIDTA ( Rs mn) IT Services IT Products Total Adjusted EBIDTA Adjusted IT services EBIDTA margin (%) 16.0% 21.3% 19.9% 17.4% 17.1% 17.7% Adjusted IT products EBIDTA margin (%) 2.6% 3.5% 4.4% 3.0% 3.4% 3.5% EBIDTA margin 6.7% 10.0% 9.9% 7.6% 8.2% 8.4% PAT ( Rs mn) APAT ( Rs mn) Adjusted EPS Growth (%) 135.3% 84.9% 18.7% 5.8% 12.9% 11.8% P/E DPS Dividend Payout Ratio 55.8% 56.4% 61.0% 64.7% 60.0% 60.0% Dividend Yield (%) 2.3% 4.3% 5.6% 5.8% 6.1% 6.8% ROE (%) 19.7% 32.5% 34.5% 29.1% 27.1% 27.9% Consolidated Balance sheet ( R mn) FY14 FY15 FY16 FY17 FY18E FY19E Net cash on Balance sheet Net Cash per Share Net Cash per share/mcap 14.0% 13.9% 9.4% 19.3% 21.2% 23.4% Consolidated cash flows ( R mn) FY14 FY15 FY16 FY17 FY18E FY19E Cash Flow from Operations Capex+ Acquisition FCF August 16,

8 Income Statement (Rs m) Y/e March E 2019E Net Revenue 19,404 25,211 26,273 30,100 Software Dev. Exp. 11,600 16,477 16,766 18,854 Gross Profit 7,805 8,734 9,507 11,247 Employee Cost 4,097 4,555 5,137 6,020 Other Expenses 1,788 2,256 2,215 2,709 EBITDA 1,919 1,923 2,155 2,517 Depr. & Amortization Net Interest (231) (201) (318) (236) Other Income Profit before Tax 2,216 2,143 2,353 2,633 Total Tax Profit after Tax 1,549 1,461 1,640 1,843 Ex Od items / Min. Int. (37) 77 Adj. PAT 1,513 1,538 1,640 1,843 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March E 2019E C/F from Operations 1,581 1,850 1,410 1,556 C/F from Investing (1,319) C/F from Financing (297) (1,746) (1,307) (1,438) Inc. / Dec. in Cash (35) Key Financial Metrics Y/e March E 2019E Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity (0.3) (0.4) (0.4) (0.4) Net Wrkng Cap. (days) (14) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Balance Sheet Abstract (Rs m) Y/e March E 2019E Shareholder's Funds 4,710 5,846 6,337 6,886 Total Debt 1, Other Liabilities Total Liabilities 6,583 6,376 6,767 7,199 Net Fixed Assets Goodwill Investments 522 1,178 1,178 1,178 Net Current Assets 4,722 3,858 4,270 4,722 Cash & Equivalents 2,951 2,477 2,689 2,928 Other Current Assets 5,103 6,958 7,065 7,978 Current Liabilities 3,332 5,577 5,484 6,184 Other Assets Total Assets 6,583 6,376 6,767 7,199 Quarterly Financials (Rs m) Y/e March Q2FY17 Q3FY17 Q4FY17 Q1FY18 Net Revenue 5,224 6,126 7,083 6,345 EBITDA % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Adj. PAT August 16,

9 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 45.2% 37.9% 16.9% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Madhu Babu, BTech & PG MBA, Research Analysts, 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. 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. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Madhu Babu, BTech & PG MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. August 16,