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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-
high growth profile (three year organic compound annual growth rate of 113%);
superior margin of more than 25%;
excellent partnership network (Salesforce, AWS, Adobe, Snowflakes, etc.); and
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-
growth acceleration in IITS;
strong Microsoft relationship;
new CEO focus on improving sales engine;
continued growth in divided per share; and
high return on equity of more than 35%.
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