Sonata delivered soft 4QFY18 with slight miss on both revenue and IITS margin. International IT services (IITS) revenue was flat QoQ at $37.4 million, below our estimate of $38.9 million. Adjusting for one-time pass through revenue last quarter, QoQ IITS revenue growth was 2.7%. IITS margin slipped to 19.8% (vs our estimate of 21.0%) despite higher off-shoring. Travel and Retail were under pressure while OPD (28% of rev) was flat QoQ. Focus on IPs and Platforms is driving Digital revenue. Total revenue stood at Rs 626 crore, down 18.4% QoQ, led by drop in Domestic Product & Services’ (DPS) revenue.
IITS’ business strategy to provide business solutions wrapped with IPs (Rezopia, Halosys, Brick & Click and RETINA) is on track.
This is a major differentiator for Sonata, and is the base of its Platformation strategy. IP led revenue is growing faster than company average and is aiding margin expansion.
Management is targeting double digit revenue growth in IITS business, led by OPD, Retail and Travel (SAP Hybrid and Rezopia) verticals. We expect IITS’ dollar revenue to grow 14/15% with margin of 20/21% in FY19/20E. We like Sonata IP-focussed business model, capability to scale up top-accounts, quality balance sheet (net cash of Rs 48/share, 13% of Mcap), high RoE and high dividend yield. Maintain BUY with a TP of Rs 380 based on 16x FY20 EPS.
ADM/IMS grew 4.3/11.8% QoQ. Testing was down 5.3% QoQ. Top5/10 client revenue were down 1.6/2.8% QoQ. Consolidated EBITDA margin expanded 167bps QoQ to 10.2%, owing to higher margins in the DPS offset by IITS.
We expect IITS’ revenue growth to revive in 1Q. IITS’ margins will expand gradually led by higher IP revenue. The stock is available at 13% discount to the mid-cap IT average P/E multiple.
HDFC Securities