Sonata Software’s USD revenue from IITS business rose at a healthy pace of 4.3 per cent QoQ to touch US$40.8mn (above our estimate by 1.8 per cent). In CC terms, IITS revenue rose by a solid 5 per cent QoQ, well above our estimate of 2.5 per cent. In INR terms, IITS revenue rose by 3.2 per cent QoQ to Rs2.84bn. On the other hand, DPS revenue saw a 72.8 per cent QoQ revenue increase to Rs5.63bn on seasonality. Consolidated revenue saw a 42.3 per cent QoQ decline to Rs8.44bn, while YoY growth was 10.1 per cent. Consolidated EBITDA margin saw a 65bps QoQ decline to touch 11.8 per cent owing to higher DPS revenue share, which earns lower margins. On YoY basis, EBITDA margin rose by a strong 334bps aided by INR depreciation and higher IITS business share; in absolute terms, EBITDA rose by a healthy 34.9 per cent YoY. Consolidated EBIT margin declined 51bps QoQ but rose 340bps YoY, while adjusted net profit rose 2.8 per cent QoQ and 29.6 per cent to Rs639mn, at a slower pace than EBIT growth owing to negative other income (forex loss of Rs64mn). Segment-wise, Sonata reported a superlative 779bps QoQ rise in IITS EBITDA margin (28.4 per cent vs. 20.6 per cent in 2QFY19) led by higher IP revenue, utilisation and better pricing on increased IP revenue. However, management believes a more sustainable level stands at 22-24 per cent. On the other hand, DPS margin saw a 197bps QoQ decline. From vertical perspective, Retail revenue rose by a healthy 4.3 per cent QoQ, while OPD and Travel revenue grew by subdued rates of 0.6 per cent and 0.7 per cent QoQ, respectively in USD terms and revenue from ‘Others’ vertical rose by a robust 16.6 per cent QoQ. From service perspective, Mobility clocked robust 39.1 per cent QoQ revenue growth, while ADM, Testing, AX, ERP, IMS and BI all saw revenue growth of 4.3 per cent QoQ. Geo-wise, Europe (+11.3 per cent QoQ) and RoW (+4.3 per cent QoQ) clocked healthy growth, while the US rose by a subdued 0.7 per cent QoQ.
Focus on platformation strategy to drive growth: Sonata’s IITS revenue growth came in at a healthy 4.3 per cent QoQ in USD terms and at a robust 5 per cent QoQ in CC terms. Sonata continues to focus on platforms and IP-led solutions (‘platformation’). Focus on consumer-centric verticals, which require high investment in digital initiatives, has been the key tailwind. In 3QFY19, 19.1 per cent of Sonata’s revenue was IP-driven (vs. 18 per cent in 2QFY19), which rose by a strong 10.7 per cent QoQ. We expect focus on platformation strategy to drive growth and profitability.
Outlook & valuation: We 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 its platform focus, investments made in IP and S&M, decent cash generation and reasonable valuation, coupled with healthy growth (19.6 per cent EPS CAGR over FY18-FY20E), we believe there exists legroom for further upside, notwithstanding strong stock performance over the past year. We maintain our BUY recommendation on the stock with an unchanged target price of Rs420.