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HDFC Securities Institutional Equities
Sonata Software Ltd.'s growth is expected to accelerate, supported by recent deal wins, a focus on new verticals, strategic partnerships, and the expansion and deepening of client relationships. The company has set ambitious goals, aiming for ~20% of its services revenue to come from AI-enabled services and to reach a total revenue of $1.5 billion, with IT services margins in the low 20s. The IITS segment is expected to achieve a run rate of ~$500 million by FY27E, which implies a CQGR of ~4% and a CAGR of ~15% over FY24-27E.
The margin target suggests an expansion of ~200 bps from current levels, led by operating leverage. The company has seen significant progress in its cloud and data pipeline, which now constitutes 51% of its pipeline compared to ~15% two years ago.
Sonata's investments in Gen AI, Microsoft Fabric, and joint GTM initiatives with Microsoft (Dynamics CRM) and AWS are yielding results. The Gen AI/Microsoft Fabric pipeline stands at ~$67/91 million across 110 customers.
Growth will be driven by the healthcare, life sciences, and BFSI verticals, offset by weakness in the retail and manufacturing verticals. The IITS segment clocked an organic CAGR of ~15% over FY22-24. However, growth is moderating to ~6% in FY25E due to client-specific issues in the retail and healthcare verticals.
We expect IITS growth to bounce back in FY26E and achieve a ~15% CAGR over FY25-27E. IITS margins will recover to ~20% in FY26E versus ~18% in Q2 FY25. We maintain our Add rating and assign a SoTP-based target price of Rs 700, based on a 30/20x P/E multiple to IITS/DPS Dec-26E EPS.
The stock is trading at a multiple of 32/28x FY25/26E and generates a healthy RoE of 36%.
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