Sonata Software - Changing Orbit: HDFC Securities

HDFC Securities Institutional Equities

Sonata Software Ltd. announced its largest acquisition of Quant Systems, which involves a cash payout of $65 million and an earn-out of $95 million payable over the next two years. The deal is valued at price/sales of 4.3 times (1.8 times excluding earnout), which we believe is on the higher side but it is justified by Quant’s-

1. high growth profile (three year organic compound annual growth rate of 113%);

2. superior margin of more than 25%;

3. excellent partnership network (Salesforce, AWS, Adobe, Snowflakes, etc.); and

4. domain capabilities in the banking, financial services and insurance and healthcare verticals.

The acquisition is in line with management’s target to double IITS revenue (hit half a billion) in four years (organic CAGR of ~15%), supported by higher investments in new verticals and geographies and expanding partnerships beyond Microsoft.

The acquisition will also add two new clients to the top-five list of Sonata’s and will help expand its presence in the BFSI and healthcare verticals.

We like Sonata based on-

1. growth acceleration in IITS;

2. strong Microsoft relationship;

3. new CEO focus on improving sales engine;

4. continued growth in divided per share; and

5. high return on equity of more than 35%.

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