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IDBI Capital Report
Sonata Software Ltd. delivered a resilient Q3 FY26 performance despite headwinds from a few large clients. Revenue grew marginally QoQ, but profitability improved sharply, with Ebitda rising to ~19.5%, driven by higher utilization, offshore mix improvement, AI-led productivity, and cost optimisation, even after absorbing wage hikes and higher cloud costs.
The company's strategy as a modernisation engineering firm powered by platforms and AI is gaining traction, with AI-led deals now contributing 14% of the order book and cloud/data forming ~50% of the pipeline. Large deal momentum remains strong, with two multi-year BFSI wins improving medium-term revenue visibility. BFSI and healthcare continue to be core growth engines, while retail and some TMT segments remain soft due to client-specific budget cuts.
North America now contributes over 70% of revenue, reflecting deeper client penetration. Management expects near-term growth to remain muted for one–two quarters but is confident of returning to YoY growth as large deals ramp up. Overall, Sonata's improving margins, strong order book, AI differentiation, and disciplined execution support a stable medium-term outlook despite short-term revenue volatility.
The brokerage upgrades its rating to Buy due to the recent stock price correction, valuing the stock at 17.8x FY27E earnings per share with a same target price of Rs 355.
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