Fundamental Analysis Of Sonata Software: When the US economy took a hit, a direct impact could be seen on some of the most prominent Indian IT companies. The IT Industry in India took a significant beating due to the recession and economic slowdown. Some companies managed to sustain themselves during this period and thrive beyond their goliath-sized competitors.
One such company we’re going to write about is Sonata Software. We’ll go through the Indian IT industry, and perform a brief fundamental analysis of Sonata Software.
Indian IT Sector: Industry Overview
A significant portion of India’s GDP comes from the IT Sector. It is estimated that 10 percent of India’s GDP will be from the IT sector by 2025, up from 7.4 percent currently. The main growth factor for this industry is IT services, BPM, and R&D . Indian IT companies benefit exponentially from their business operations in North American and European countries.
Nasscom estimates that India’s IT industry revenue touched $227 billion in FY 2022. Even IT spending is expected to rise to $101.8 billion for the same year. The majority of expenses in the Indian IT industry go towards the workforce, which is sized at 50 lakh employees in the sector.
Investments in the IT sector go towards skill development, future integration, artificial intelligence, the gaming industry, and financial technology, to name a few. The IT hubs in India presently are Bengaluru, Pune, Hyderabad, and Chennai, which house most of the IT giants and startups located in the country.
The major IT companies founded in India now have offices worldwide, with some even listing themselves on foreign markets.
Sonata Software: Company Overview
Sonata Software is an IT company, founded in 1986. Their prime operating regions are North America, Asia-Pacific, and Europe. The company’s clients include tech giants like Microsoft, Google, and Amazon. Sonata has sales offices in India, North America, the UK, Europe, Africa, and Australia and multiple development centers in Canada, Ireland, the USA, and India.
The company’s core industry focus is retail, travel services, energy, agriculture, commodities, and professional services. Sonata Software also has its fully owned subsidiary operating in the USA and is one of the few companies in the world to be a part of the Microsoft Inner Circle.
Fundamental Analysis Of Sonata Software
Using the latest annual report (FY 22), we’re going to conduct a fundamental analysis of Sonata Software, starting with the company’s revenue and profit growth over the years. By industry, Sonata Software is an IT company with a global presence. By size, it is a small-cap IT company, with a market capitalization of ₹12,107 crores. The company employs 5,158 professionals, of which 4678 are technology employees.
Sonata Software – Financials
Revenue, Dividends & Profit Growth
|Year||Net Sales (Rs. In Cr.)||Profit After Tax (Rs. In Cr.)||Dividend Per Share (In Rs)|
In the financial year ending 2022, Sonata Software reported revenues of ₹5,553 crores, up from ₹4,228 crores last fiscal. It added 44 new clients during the year. They’ve had a 5-year CAGR of 23%, far outperforming its much larger peers. Profits have grown by over 54 percent from the previous year, and its 5-year CAGR is at 18 percent, which is moderately good.
The company’s international IT services contribute 27 percent of its total revenues and 73 percent of its profits after tax. Domestic products and services of the company made up 73 percent of total revenues and 27 percent of its profits after tax. International services grew 26 percent year on year, and domestic services grew by 31 percent year on year.
While the company’s sales and profits are growing, its operating profit margin is fairly lower than its peers at 8-10 percent. Even the company’s net profit margin levitates around 6-8 percent, which leaves a lower profit for the company. In the past 5 years, the company has consistently paid dividends to its shareholders, with a 5-year CAGR of 19 percent and 50 percent growth from the previous year.
Compared to most IT companies, Sonata Software has a phenomenal return on equity and return on capital. The company has managed to keep RoE and RoCE well above 25 percent consistently over the past 5 years.
This shows the efficient use of company resources to improve the company’s performance. The latest ROE and RoCE of the company is 35 and 37 percent respectively (FY 22).
Debt & Interest Coverage Ratio
|Year||D/E Ratio||Interest Coverage Ratio|
Sonata Software has a very low D/E ratio of 0.03, as of FY 22. The company reduced the little debt it had over the years and has also improved its interest coverage ratio since FY 20. A significant portion of its interest coverage was depleted due to the unexpected 2020 pandemic, and the company’s replenishing the interest reserves over the years.
Sustainability & CSR Initiatives
Besides innovation in technology, Sonata Software has launched multiple sustainability initiatives towards renewable energy, reducing electricity consumption, optimum utilization of electronics such as laptops, and the capture of emissions.
Besides sustainability, the company also took up
- CSR initiatives to assist the disabled through its “From Isolation To Inclusion” project.
- In association with CUPA, an animal welfare NGO, they have rescued, rehomed, and vaccinated thousands of dogs.
- The company’s reforestation project helped plant over 42,000 trees across multiple states in India to offset tonnes of CO2 emissions.
Future Plans Of Sonata Software
The main areas of business for Sonata Software, as we mentioned before, are retail, digital transformation (ISVs), customer experience, agri commodities, and services. The company’s estimation of the growth of these industries in the future causes them to focus more on innovation and technology advancements within these key sectors.
The company’s platformation methodology allows companies to build strong digital platforms to improve their client’s business growth. Their support is end-to-end in this regard so that the company can fully adopt the software within their organization.
The Platformation product is implemented across all of Sonata’s service lines, which include the ones we’ve mentioned above.
In order to better assist their customers, Sonata is committed to investing in cloud computing, Artificial Intelligence, and machine learning to improve customer service.
Key Financial Metrics Of Sonata Software
|CMP||₹ 863||Market Cap (Cr.)||₹ 12,107 Cr.|
|EPS||₹ 31.3||Stock P/E||27.6|
|ROCE||43.7 %||ROE||37.2 %|
|Face Value||₹ 1.00||Book Value||₹ 83.1|
|Promoter Holding||28.2 %||Price to Book Value||10.4|
|D/E Ratio||0.18||Dividend Yield||1.78 %|
|Net Profit Margin||6.71 %||Operating Profit Margin||8.01 %|
In 2020, companies and world governments understood the absolute necessity of technology and digital infrastructure to keep the global economy and structure functioning. Digital infrastructure was never as important as today, and IT companies such as Sonata Software are aware of this endless opportunity.
With India still dominating the top position in global IT services and BPM, the requirement and business opportunities in this sector will continue to play an important role in shaping India’s economy.
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