Strong growth, reasonable valuations August 16, 2017 Madhu Babu madhubabu@plindia.com +91 22 66322300 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) 105.1 3M 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. 2018 15.6 16.1 3.1 2019 17.5 18.7 6.2 Price Performance (RIC: SOFT.BO, BB: SSOF IN) (Rs) 250 200 150 100 50 0 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) 2016 2017 2018E 2019E Revenues (Rs m) 19,404 25,211 26,273 30,100 Growth (%) 15.4 29.9 4.2 14.6 EBITDA (Rs m) 1,919 1,923 2,155 2,517 PAT (Rs m) 1,513 1,538 1,640 1,843 EPS (Rs) 14.4 14.6 15.6 17.5 Growth (%) 126.3 1.7 6.7 12.4 Net DPS (Rs) 9.0 9.0 9.4 10.5 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 9.9 7.6 8.2 8.4 RoE (%) 33.6 29.1 26.9 27.9 RoCE (%) 27.9 24.7 25.5 26.8 EV / sales (x) 0.8 0.6 0.5 0.5 EV / EBITDA (x) 8.1 7.6 6.7 5.6 PE (x) 11.1 10.9 10.3 9.1 P / BV (x) 3.6 2.9 2.7 2.4 Net dividend yield (%) 5.6 5.6 5.9 6.6 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
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) 32.7 30.7 6.5% 29.2 12.0% 31.9 2.5% IT Services Revenues 2112 2040 3.5% 1957 8.0% 2107 0.2% IT products Revenues 4341 5118 15% 4893 11% 4862 10.7% Total consol Revenues 6453 7158 9.8% 6850 5.8% 6969 7.4% Consol EBITDA 476.8 441.3 8.0% 439.1 8.6% 544 12.4% EBITDA Margins 7.4% 6.2% 122 bps 6.4% 98 bps 7.8% 42 bps PBT 597 568 5.2% 522 14.4% 574 4.0% Tax expense 166 163 154 178 Tax rate 27.7% 28.7% 29.5% 31.0% PAT 432 404 6.7% 368 17.2% 396 9.0% EPS (Rs) 4.1 3.8 6.7% 3.5 17.2% 3.8 8.9% 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, 2017 2
Exhibit 2: IT Services USD revenues ( USD mn) 34.0 32.7 32.0 30.0 28.0 26.0 24.0 23.1 24.3 25.0 25.9 25.9 26.0 27.4 28.5 29.2 31.2 30.3 30.7 22.0 20.0 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, 2017 3
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 1QFY18 70.00 68.00 66.00 64.00 62.00 60.00 58.00 56.00 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 15 12 9 6 3 0 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 0.0% 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, 2017 4
Key Metrics Exhibit 7: Headcount metrics Headcount 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 IT Services 2575 2746 2837 2896 2889 2908 3139 3111 3144 3147 3161 3213 3418 Products 111 110 114 122 130 142 140 140 147 156 153 153 157 Total 2686 2856 2951 3018 3019 3050 3279 3251 3291 3303 3314 3366 3575 Net additions 121 170 95 67 1 31 229 28 40 12 11 52 209 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 36 38 38 35 34 31 29 28 30 31 30 29 30 Travel 29 27 30 33 32 31 33 31 29 28 26 27 28 CPG 17 16 17 14 16 19 21 24 24 23 27 26 24 Others 18 19 17 17 18 19 17 17 17 17 17 18 18 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 9.5 9.1 8.8 8.1 7.9 8.0 8.8 9.7 9.1 8.9 9.8 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 7.5 8.5 8.3 8.1 9.0 8.8 8.5 8.7 7.9 8.3 9.2 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 4.3 3.6 4.1 4.9 5.8 6.8 7.0 7.2 8.2 8.0 7.9 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 4.3 4.4 4.7 4.9 4.7 4.8 5.0 5.3 5.2 5.5 5.9 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, 2017 5
Exhibit 11: Service mix of revenues (%) for IT services business 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 ADM 35 35 35 29 26 26 24 23 25 26 24 25 23 Test 14 17 17 18 19 19 18 18 15 16 17 17 19 AX 16 14 13 13 15 14 13 15 16 15 15 15 17 ERP 7 4 4 5 5 6 3 4 4 4 5 5 5 IMS 8 9 8 9 10 12 12 15 16 18 19 19 18 BI 7 7 7 7 6 7 9 9 9 9 9 8 8 E commerce 9 8 8 10 9 9 10 9 7 6 6 6 5 Mobility 2 3 3 3 4 2 4 2 2 2 2 1 1 Cloud 0 0 2 3 3 3 5 4 6 3 4 4 4 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 73 75 70 72 72 73 72 67 70 71 70 70 70 August 16, 2017 6
Exhibit 13: Consolidated financial summary of Sonata Software FY14 FY15 FY16 FY17 FY18E FY19E USD revenues of IT services ( USD mn) 79.9 98.3 107.8 121.4 137.9 156.6 Growth (%) 29.5% 23.0% 9.7% 12.6% 13.6% 13.6% Average Rate (USD vs INR) 60.5 61.7 65.6 67.2 65.7 66.0 IT services Revenues ( Rs mn) 4,835 6,068 7,067 8153 9053 10337 Growth (%) 44.2% 25.5% 16.5% 15.4% 11.0% 14.2% IT Products Revenues ( Rs mn) 10,847 10,926 12,501 17342 17311 19763 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 773 1294 1406 1415 1546 1826 IT Products 280 383 547 517 596 692 Total Adjusted EBIDTA 1053 1677 1954 1931 2141 2517 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) 777 1337 1586 1537 1649 1843 APAT ( Rs mn) 706 1305 1549 1460 1649 1843 Adjusted EPS 6.7 12.4 14.7 13.9 15.7 17.5 Growth (%) 135.3% 84.9% 18.7% 5.8% 12.9% 11.8% P/E 24.1 13.0 11.0 10.5 9.8 8.8 DPS 3.7 7.0 9.0 9.0 9.4 10.5 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 2387 2375 1600 3125 3437 3794 Net Cash per Share 22.7 22.6 15.2 29.7 32.7 36.1 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 1269 768 1581 1850 1410 1556 Capex+ Acquisition 39 140 848 98 100 100 FCF 1229 627 733 1753 1310 1456 August 16, 2017 7
Income Statement (Rs m) Y/e March 2016 2017 2018E 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 62 93 120 120 Net Interest (231) (201) (318) (236) Other Income 420 403 368 280 Profit before Tax 2,216 2,143 2,353 2,633 Total Tax 666 682 713 790 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) 105.1 105.1 105.1 105.1 EPS (Rs.) 14.4 14.6 15.6 17.5 Cash Flow Abstract (Rs m) Y/e March 2016 2017 2018E 2019E C/F from Operations 1,581 1,850 1,410 1,556 C/F from Investing (1,319) 9 100 120 C/F from Financing (297) (1,746) (1,307) (1,438) Inc. / Dec. in Cash (35) 114 203 238 Key Financial Metrics Y/e March 2016 2017 2018E 2019E Growth Revenue (%) 15.4 29.9 4.2 14.6 EBITDA (%) 14.5 0.2 12.1 16.8 PAT (%) 13.1 1.7 6.7 12.4 EPS (%) 126.3 1.7 6.7 12.4 Profitability EBITDA Margin (%) 9.9 7.6 8.2 8.4 PAT Margin (%) 7.8 6.1 6.2 6.1 RoCE (%) 27.9 24.7 25.5 26.8 RoE (%) 33.6 29.1 26.9 27.9 Balance Sheet Net Debt : Equity (0.3) (0.4) (0.4) (0.4) Net Wrkng Cap. (days) (14) Valuation PER (x) 11.1 10.9 10.3 9.1 P / B (x) 3.6 2.9 2.7 2.4 EV / EBITDA (x) 8.1 7.6 6.7 5.6 EV / Sales (x) 0.8 0.6 0.5 0.5 Earnings Quality Eff. Tax Rate 30.1 31.8 30.3 30.0 Other Inc / PBT 18.9 18.8 15.7 10.6. Balance Sheet Abstract (Rs m) Y/e March 2016 2017 2018E 2019E Shareholder's Funds 4,710 5,846 6,337 6,886 Total Debt 1,712 343 243 125 Other Liabilities 161 187 187 187 Total Liabilities 6,583 6,376 6,767 7,199 Net Fixed Assets 291 287 266 246 Goodwill 910 909 909 909 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 138 144 144 144 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 506 536 441 477 % of revenue 9.7 8.7 6.2 7.5 Depr. & Amortization 22 23 29 30 Net Interest 13 24 11 17 Other Income 83 86 110 158 Profit before Tax 555 575 511 588 Total Tax 176 189 163 166 Profit after Tax 379 387 405 432 Adj. PAT 379 387 405 432. August 16, 2017 8
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