'Add' Sonata Maintains HDFC Securities But Reduces Target Price, Citing Near-Term Uncertainty, Macro Pressures

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HDFC Securities Institutional Equities

Sonata Software Ltd. has positioned itself as a differentiated modernization engineering and AI-driven organization aiming for top-quartile growth. However, Sonata’s growth has slowed down in the last four quarters, owing to client specific issues (Microsoft and BFSI) and macro challenges (retail) despite ramp-up of large deals won.

Microsoft dynamics (sell-to) growth, which was under stress, is expected to stabilize and investments in areas like data, Dynamics CRM, and Fabric will accelerate growth.

One large BFSI client continues to experience budgetary constraints, and the slowdown is expected to continue in Q2 as well. The retail and manufacturing verticals remain under industry-wide stress due to tariffs and regulatory changes.

The DPS business growth is challenged due to IT/ITES softness and price sensitivity, partly due to Microsoft’s strategy to directly engage with large enterprise clients. Sonata aims for 18% IITS EBITDA margin by FY26E (wage hike in Q2 and Q3), driven by revenue stabilization, an improved onsite-offshore mix and better utilization.

Overall, the growth engine appears to be under stress, and we expect FY26E to be a muted year, with IITS revenue/consolidated EPS CAGR of 7/13% over FY25-28E.

Considering the near-term growth challenges and slow margin recovery, we cut our EPS estimates by 7-8%.

We maintain Add with a SoTP-based target price of Rs 400, valuing the IITS business at 22x and the DPS business at 15x.

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