CMP* (Rs) 289 Upside/ (Downside) (%) 18. Market Cap. (Rs bn) 30 Free Float (%) 69 Shares O/S (mn) 105

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1 3QFY18 Result Update February 08, 2018 CMP* (Rs) 289 Market Cap. (Rs bn) 30 Free Float (%) 69 Shares O/S (mn) 105 IITS Revenue Continues to Remain Buoyant; Margin Growth Heartening In-line with our estimate, s USD revenue from IITS business rose by a decent 2.7% QoQ in 3QFY18 to US$37.4mn. Staging a comeback to normal level, DPS revenue surged by 165.5% QoQ to Rs5.3bn (on a lower sequential base), as the segmental revenue was impacted in 2QFY18 due to a change in go-to-market strategy of some key principals. Consolidated revenue surged by ~80% QoQ, while consolidated EBITDA margin declined by 434bps QoQ owing to a higher contribution of DPS business to revenue. However, IITS margin grew by a strong 317bps QoQ led by a higher proportion of IP revenue and lower sta cost owing to a reduction in employee base led by completion of a temporary project. Consolidated EBIT margin declined by 399bps QoQ, while adjusted net profit rose by 9.2% QoQ to Rs493mn. Share price (%) 1 mth 3 mth 12 mth Absolute performance Relative to Nifty Shareholding Pattern (%) Sep'17 Dec'17 Promoter Public From vertical perspective, following two successive quarters of growth, OPD revenue declined by 0.8%. On a positive note, Sonata won some new clients towards 3QFY18-end, ramp-ups for which should start reflecting by 1QFY19E. Aided by Sonata s focus on platforms, Travel and CPG & Retail verticals clocked strong revenue growth of 6.6% and 6.7% QoQ, respectively. Service-wise, Testing and Microsoft AX were the key growth drivers, which grew by 8.5% QoQ and 8.2% QoQ, respectively. Notably, AX being the 2nd largest service after ADM (with 20% revenue contribution), higher revenue reflects Sonata s strong relationship with Microsoft. Geowise, growth was evenly spread across geographies, with the US, Europe and Rest of the World clocking 2.7% QoQ growth each. IP Revenue Drives Growth & Margin Following two successive quarters of strong growth, Sonata delivered another good quarter in IITS revenue, which rose by 2.7% QoQ in USD terms. This growth comes on top of 11.3% QoQ and 6.5% QoQ growth in 2QFY18 and 1QFY18, respectively. On YoY basis, IITS revenue (in USD terms) rose by a strong 23.4% marking the fastest growth since 2QFY15 led by focus on platforms and IP-led solutions (platformation). Focus on consumer-centric verticals which require high investment in digital initiatives continues to remain the key tailwind. Notably, 15.2% of Sonata s 3QFY18 revenue was IP-led (vs. 15% in 2QFY18 and 14% in 1QFY18). We expect focus on its platformation strategy to drive growth and profitability, going forward. 1 Year Stock Price Performance Feb-17 Mar-17 Apr-17 May-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Note: * CMP as on Feb. 08, 2018 Nov-17 Dec-17 Jan-18 Feb-18 Outlook & Valuation We like Sonata s dierentiated business, high dividend yield, quality balance sheet, high RoE and lack of equity dilution in last 17 years. Notwithstanding sharp run-up in stock price in last couple of months, we envisage enough legroom for further upside on the back of Sonata s platform focus, investments made in IP and S&M, decent cash generation and reasonable valuation coupled with healthy growth (18.3% EPS CAGR over FY17-FY20E). We raise our EPS estimates 4-6% for FY18E and FY19E. Upgrading our PE multiple to 14x from 12x on higher growth, we maintain our recommendation on the stock with a revised Target Price of Rs340 (from Rs234 earlier). Key Financials (Rs mn) FY17 FY18E FY19E FY20E Net Sales 25,211 26,586 29,948 33,495 EBITDA 1,923 2,272 2,773 3,421 APAT 1,537 1,880 2,134 2,546 Diluted EPS (Rs) P/E (x) Research Analyst: Harit Shah Contact: harit.shah@relianceada.com EV / EBITDA (x) RoE (%)

2 Conference Call Key Highlights Headcount in IITS business declined by ~5% QoQ owing to completion of a critical project of a strategic client, as these employees were temp hires. Staging a comeback to normal levels, DPS revenue surged substantially albeit on a lower sequential base, as revenue was impacted in 2QFY18 due to a change in go-tomarket strategy of some key principals. The Management expects the OPD business to start showing growth, as it has won new clients in this business towards 3QFY18-end, which should start ramping up from 1QFY19E onward. Sonata earned ~$2.4mn revenue (+3% QoQ) from IBIS, while it earned 14-15% EBITDA margin (vs. 11% in 2QFY18 and just 5% in 1QFY18), reflecting improving performance. The Management expects a marginal benefit of the US Tax Code. Key Risks Client-specific issues in any of the Top-10 clients could impact revenue growth. Growth pangs in OPD vertical, given the disruptive impact of SMAC, could aect revenue growth. Cost escalation could impact project delivery and margins. Cannibalisation of existing revenue particularly on ADM and ERP side following strategic shift to Cloud architecture. Currency risk. Exhibit 1: Quarterly Performance (Consolidated) Particulars (Rs mn) 3QFY18 2QFY18 QoQ (%) 3QFY17 YoY (%) IITS Net Revenue (US$ mn) Consolidated Net Revenue 7,667 4, , Inventory Costs 5,171 1, , Employee Costs 1,312 1,321 (0.7) 1, Other Operating Expenses EBITDA Depreciation (3.1) EBIT Interest Cost 9 12 (26.4) 24 (62.8) Other Income (41.9) 102 (36.1) PBT Tax (6.3) Minority Interest APAT E/o (adj for tax) RPAT

3 Exhibit 2: Margin Break Up Particulars 3QFY18 2QFY18 QoQ (bps) 3QFY17 YoY (bps) Inventory Cost % Net Revenue , Employee Cost % Net Revenue (1,383) 20.1 (301) SG&A and Other Exp. % Net Revenues (538) 9.3 (231) EBITDA Margin (%) (434) 9.5 (104) EBIT Margin (%) (399) 9.1 (98) Tax Rate (%) (550) APAT Margin (%) (414) 7.0 (58) Exhibit 3: Key Assumptions Particulars FY17 FY18E FY19E FY20E IITS USD revenue growth (%) USD/INR rate IITS EBITDA margin (%) DPS EBITDA margin (%) Cons. EBITDA margin (%) Exhibit 4: Vertical break-up OPD TTL CPG & Retail Others Exhibit 5: Vertical growth OPD (6.0) (2.1) (0.8) TTL (4.2) 3.2 (9.8) CPG & Retail (2.4) (1.7) Others (8.3) (3.0) 3

4 Exhibit 6: Service line break-up ADM Testing AX ERP IMS BI E-commerce Mobility* Cloud Rezopia ; Mobility and Cloud have been clubbed together wef. 3QFY17, and Rezopia has also been included as part of Mobility wef. 2QFY18. Exhibit 7: Service line growth ADM (10.4) 5.5 (2.0) Testing (14.6) AX (2.9) ERP (17.8) IMS BI (2.9) (9.9) 6.5 (2.6) 17.4 E-commerce (20.3) (8.4) (2.9) 1.3 (11.2) 33.6 (14.4) Mobility* 2.5 (46.6) (2.9) (49.3) (17.8) Cloud (48.8) 6.8 Rezopia 70.8 (14.5) (27.2) ; Mobility and Cloud have been clubbed together wef. 3QFY17, and Rezopia has also been included as part of Mobility wef. 2QFY18. Exhibit 8: Geographic break-up USA Europe RoW Exhibit 9: Geographic growth USA (1.2) Europe (10.4) RoW (4.9) (6.8)

5 Exhibit 10: Onsite-oshore contribution Onsite Oshore Exhibit 11: Onsite-oshore growth Onsite (13.7) Oshore (3.7) Exhibit 12: Client contribution Top Clients Top Clients Top Non top ; From 4QFY16, Sonata started giving out top-5 and top-20 client data. Exhibit 13: Client growth Top (4.5) Clients (2.1) (2.9) 1.3 (12.9) Top (4.3) Clients (52.7) (12.9) 11.3 (8.7) Top-20 (2.7) 9.7 (0.4) Non top (2.1) (11.7) (3.7) (1.9) ; From 4QFY16, Sonata started giving out top-5 and top-20 client data. 5

6 Profit and Loss Statement Y/E March (Rs mn) FY17 FY18E FY19E FY20E Net Sales 25,211 26,586 29,948 33,495 Growth (%) Total Operating Expenses 23,289 24,313 27,175 30,074 EBITDA 1,923 2,272 2,773 3,421 EBITDA (%) EBITDA Growth (%) Depreciation EBIT 1,830 2,142 2,625 3,254 EBIT (%) EBIT Growth (%) (1.5) Other Income Interest PBT 2,142 2,724 3,138 3,800 Tax (incl deferred) ,004 1,254 Minority Interest Exceptional Items PAT 1,537 1,880 2,134 2,546 PAT Growth (%) (3.1) EPS (Rs) EPS Growth (%) (3.1) Balance Sheet Y/E March (Rs mn) FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital - Equity Reserves 5,045 5,788 6,660 7,944 Total Shareholders' Funds 5,150 5,894 6,765 8,049 Total Debt Long Term Provisions & Others Creditors 4,482 4,796 5,584 6,344 Other Current Liabilities & Provns 1,791 1,837 1,965 2,094 Total Current Liabilities 6,274 6,633 7,549 8,439 TOTAL SOURCES OF FUNDS 11,953 13,024 14,779 16,920 APPLICATION OF FUNDS Goodwill & Other Intangible Assets Net Block CWIP Deferred Tax Assets LT Loans & Advances, Others Total Non Current Assets 2,124 2,260 2,411 2,579 Debtors 5,443 5,973 6,974 8,075 Cash & Bank 2,477 2,883 3,486 4,358 Liquid Investments 1,178 1,178 1,178 1,178 Other Current Assets Total Current Assets 9,829 10,764 12,368 14,342 TOTAL APPLICATION OF FUNDS 11,953 13,024 14,779 16,920 6

7 Cash Flow Statement Y/E March (Rs mn) FY17 FY18E FY19E FY20E PAT 1,537 1,880 2,134 2,546 Depreciation Working Capital Change 1,120 (170) (86) (211) Cash Flow from Operations (a) 2,751 1,840 2,196 2,501 Capex (113) (266) (299) (335) Investments (0) Cash Flow from Investing (b) (113) (266) (299) (335) Debt Issuance/(Repaid) (1,370) (33) (33) (33) Dividend (694) (1,136) (1,262) (1,262) Cash Flow from Financing (c) (2,064) (1,168) (1,294) (1,294) NET CASH FLOW (a+b+c) EO items, others (1,049) Closing Cash Balance 2,477 2,883 3,486 4,358 Free Cash Flow 2,637 1,574 1,897 2,166 Key Ratios Y/E March (Rs mn) FY17 FY18E FY19E FY20E Profitability (%) EBITDA Margin APAT Margin RoE RoIC or Core RoCE RoCE Eiciency Tax Rate (%) Fixed Asset Turnover (x) Inventory (days) Debtors (days) Payables (days) Cash Conversion Cycle (days) Net Debt/EBITDA (x) (1.8) (1.8) (1.7) (1.6) Net Debt/Equity (x) (0.7) (0.7) (0.7) (0.7) Interest Coverage (x) Per Share Data (Rs) EPS CEPS DPS BV Valuation P/E P/BV EV/EBITDA OCF/EV (%) FCF/EV (%) FCFE/mkt cap (%) Dividend Yield (%)

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