Sonata Software A Turnaround Story

sonata betting on IOT http://www.bseindia.com/corporates/ann.aspx?scrip=532221&dur=A&expandable=0

Thanks Sali John for the information. Here is the extract from the press release

Sonata Software, Aeris to offer next-gen IoT and mobile solutions for enterprises

Posted On: 2016-08-30 23:31:00

Sonata Software, a global technology services and solutions company, has formed an alliance with Aeris, a pioneer and leader in the Internet of Things (IoT) market, for next-generation IoT and mobile solutions for enterprises. The alliance brings together expertise in IoT platform and solutions from Aeris with the mobile platform and software development expertise of Sonata. The result of Sonata and Aeris working together is an ideal alliance for enterprises seeking to execute next-generation mobility and IoT solutions by leveraging the combined domain experience and technology platforms of both companies.

Sonata’s mobility platform, Halosys, is a single Unified Enterprise Mobile Enablement Platform that enables businesses to connect, build, secure, manage and deploy an enterprise-wide mobile applications portfolio. The platform seamlessly extends existing enterprise security, identity and business applications. This simplifies, accelerates and ensures a reliable way to execute mobility programs at scale, with an underlying architecture that adheres to emerging mobile and IoT standards and technology trends.

The Aeris IoT solutions platform is a comprehensive, patented and end-to-end enabler for enterprises to bring IoT solutions to market quickly, cost-efficiently and with the highest security.The platform consists of AerPort� connectivity management platform, AerCloud� applications enablement platform, AerCore� IoT network and AerVoyance� IoT analytics platform.

“We are thrilled to have Aeris as an IoT alliance. The complementarity between Aeris and Sonata’s enterprise mobility platform solutions provides a great way for enterprises to expedite both B2B and B2C IoT connected mobile and web application and also provide solutions and services to their customers by leveraging Sonata’s global delivery and support capabilities,” said Avinash Harsh, Head of enterprise mobility platform, Sonata Software.

Mark Aylor, Senior Director of partner channel, Aeris, said, "The alliance between Sonata and Aeris will bring simplicity to the enterprise as they make the journey into the complex IoT world. Aeris’ comprehensive IoT Platform Solutions coupled with Sonata’s deep Information Technology and Software knowledge can provide enterprise organizations the resources and tools to deploy and scale their IoT Solutions to the global marketplace.

“The combination of Aeris and Sonata Software will help enterprises build profitable IoT and mobile applications,” said Dr. Rishi Bhatnagar, President, Aeris India. “Hundreds of enterprises are already relying on Aeris every day to power their mission-critical deployments. We look forward to the opportunity to help many more enterprises through our strategic alliance with Sonata.”

Shares of SONATA SOFTWARE LTD. was last trading in BSE at Rs.153.3 as compared to the previous close of Rs. 151.45. The total number of shares traded during the day was 56554 in over 1184 trades.

The stock hit an intraday high of Rs. 157 and intraday low of 151. The net turnover during the day was Rs. 8695110.

Source: Equity Bulls

Kunal,

Please find the answers as per my understanding -

  1. Sonata has two businesses, domestic and international. The domestic business has margins between 3-5% but has a lot of volume. The international business has margins around 22%. So IMHO, any metric has to be applied separately in these two segments.
    They decide domestic business on many factors - like size of the deal (e.g. this quarter they had a very large deal with lesser margin), or strategic importance (e.g. being biggest partner gives better access in headquarters) etc.
    I view, value and invest in company mainly on international business. I continue to see domestic business as a commodity business and more like “icing on cake” rather than “cake”.
    The main concern is - international business revenue is not growing fast in $ terms and they have to do acquisitions. Sonata has to start showing some organic growth - to get rerating.

  2. Retail -> They provide analytics (consumer preferences, various performance metrics etc.) and supplier/vendor management services. There are some YouTube videos of their products on sonata channel, you can check them out.
    In travel, they provide travel management services (booking, cancellations, pricing etc.) to small and medium players. Large players have their own teams.
    The other business is services business - where they help client choose the right product (from Microsoft Dynamics or IBM etc.) and help configure customise it.

  3. Again the domestic business has to be viewed separately even for resources. For international business, onshore/offshore ratio is industry standard. More the offshore headcount, better the profitabilty.

  4. Big travel players have their own IT teams. Their target audience is small players or medium players. Their investor presentation/con calls provides some examples.

Disc - I continue to hold

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@rupeshtatiya,

You seem to have commented good summarized points about Sonata.

Low margins in offshore business is one of the reasons why Mr. Market is not giving higher PE to it. International business need to grow with more pace with organic push for commanding higher PE. Though dividend yield is high, there may not be major re-rating in the stock as we can see as of today.

Disclosure: Invested. I am still studying the business model and reasons for low PE.

I feel one more reason for lesser PE is long term record of Sonata. FY12 and FY13 were bad years for company with FY12 showing a loss at operating level. After the new management took over, the results have steadily improved but I think Mr. Market will take some more time and assurance before re-rating can happen.

Disc - Invested, not a buy/sell recommendation

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I think Sonata is an evolving story. After a stellar FY 14 & FY15, FY16 was a bit tepid as one of its key customers left it. For the stock to re-rate in my view the company has to deliver 2-3 quarters of strong QoQ dollar revenue growth (~ 5% or more). If this happens without any dilution in margins , then I think it will get re-rated handsomely. Not-withstanding what’s happening in the overall IT industry.

Disc- Invested at these levels. Forms 10% of my PF. not a buy/sell recco.

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As per annual report, the short term borrowings has increased to 119 cr. from 24 cr. and long term borrowings from 0 to 54 cr. Anyone can point to where is this capital being utilized?

Hi,

From my FY17 Q1 Concall notes, could fish out the following - “Debt is owing to acquisition – US$ 8.6 Mn & Cash - 200 Cr (net of borrowings)”. This should be long term in my understanding.
Also, they often borrow ST/WC debt for there domestic product business to correct any collection mismatch - company stated policy has been clear on this, that they target RONW for this business, wherein leverage helps.

Lastly, debt is not a big (or i should say, “Any”) issue for this company, as they are floating with quite some cash and on the contrary it is good that they are leveraging wherever there is an opportunity. Even though it is quite evident from the numbers but i’ll qualify it as a personal opinion. (everyone should deeply check them for themselves :slight_smile:)

~I do own from quite some time

Cheers!

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Sonata Software results out:

BSE link - http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/38D010C6_E65E_466C_9BC4_F3975F3982EF_165552.pdf

Good to see 20% revenue growth (YoY) in international business. The EBITDA margin in international business reverted to mean of 22% from 26% and hence EBIDTA was flat.

Also company has declared 3.5 Rs/Share dividend, so good to see that they are continuing with dividned payment despite increase in taxes.

BSE link - BSEINDIA

Disc - I hold, not a buy/sell reco

Thanks,
Rupesh

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I would say good results in toto. If you look at their Core EBITDA margins (excl OI) It has increased sequentially to 20%.

The revenue trajectory is encouraging. I believe if the co executes on its strategy, margins can actually come back to earlier levels, albeit not immediately but over the next 5-6 quarters.

Discl: Invested. Not a buy/sell recco

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Lot of work has been done on the co on this thread. Just wanted to add few points which helped me while analyzing the company.

Below is the USD dollar revenue for the company over the last 15 quarters.

Barring the first 2 quarters of FY16 and Q1 17 the company has been consistently growing at 5-6% which is very encouraging given all the clamour around the deathknell of IT services companies. Sure Sonata has a small size, but still clocking ~5% sequential growth is very good. The reasons for slow/no growth in those quarters were also sufficiently explained. (FY 16- one top 10 client went away, Q1 17- Brexit and one time visa costs etc)

The other thing is around Margins - For Sonata the EBITDA margins need to be adjusted for other Income and Forex Gains. The table below shows adjusted margins for its IT services segment

The interesting part is margins expanded sequentially this quarter. All these things point out to few important points which one can do more work on:

  1. Company is seeing good traction on revenue growth - given the environment that surrounds other IT co’s I think it is a great sign. Where is this growth coming from and why is it coming from?

  2. Margins- Across the board in the IT sector, companies are facing pricing pressure, new contracts are coming at lower prices and renewals are happening at lower prices, thus margins are on a down trend. Sonata has maintained that they are not seeing any pricing pressure so to say and the margin decline that has happened in the last 2-3 quarters was on account of investments in the business (they have hired senior staff from Persistent, Mindtree etc), lower margins in their acquired co’s - which they are turning around. The question one needs to ask again here is what is the kind of work that Sonata is doing which is helping them earn these margins and bypass the pricing pressure (In my reading 18%+ EBITDA margins are very healthy for a small IT co. Typical Mid cap IT co earns EBITDA of 15-18%, anything above that is considered very healthy)

Would be great if people from the industry can point out or we can talk to someone in the company as to what is Sonata doing right?

Discl: Invested and hence maybe biased

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Video providing good overview of Brick & Click -

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http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/FE99F954_1067_467F_84AD_A0F3F0B00E10_121353.pdf

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Sonata software results out -

Very similar results like Q2. During 9MFY17, 18% growth in revenue, EBITDA reduced to 22% compared to last year. PAT degrew a little because of additional finance cost of 2Cr & lesser other income of 1 cr.

In $ terms, QoQ revenue went down to 30.3 mn$ from 31.2 mn$. Need to listen to con call for this.

Source -
Investor Presentation
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/95CE987C_EEE7_4919_B1EB_07FAFD5677C2_155036.pdf

Q3 FY17 Results
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/83A4E352_C9F1_4448_B2A3_F49F75ABFE44_153203.pdf

Disc - I continue to hold, not a buy/sell reco

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I am no technical expert here. But I believe that there are lot of indicators that point that the stock might see an short upsurge.

The daily charts, MACD and RSI shows that there could a small uptrend. Please correct me if I am wrong.

Q3 FY17 Con Call

It was good to hear you @rohitbalakrish_ on conf call!

Revenue
The company claims to have grown by 3-3.5% QoQ in constant currency basis after adjusting for one time System Integration (=software/hardware provided to client) of 1.2 mn$ & GBP currency devaluation due to Brexit. The onshore/offshore mix has changed to 40/60 leading to better margins The company has added 3 clients this quarter ( 2 - US, 1 - Europe) & 15 till the full year.

When @rohitbalakrish_ probed them on their goal to achieve 200mn$ in topline in International business & pointed out that growth rate for last 4-5 quarters have been tepid at 4-5%, management conceded that the target might get delayed if current trend continues.

H1-B
The current proposed changes in H1-B do not seem to pose big challenge for company as only 60 employees are currently on H1-B.

Verticals
There is de-growth in Travel vertical because one large travel client is based out of UK & topline is reduced due to GBP depreciation & onshore to offshore shift. There are two offerings in travel vertical namely, Rezopia & SAP Hybrids.
There has been decent growth in Retail vertical due to launch of Brick & Click & small base of revenue. The deal size ranges from 1.5 mn$ to 3 mn$.

Performance of Acquisitions
IBIS has turned around & broken even at EBITDA level. The cost of acquisitions was 9 mn$ (financed by 8mn$ ECB debt), the company did 1.7 mn$ this Quarter & ~6.8 mn$ in FY.
Halosys contributed 2.5 mn$ in 9MFY17. The company targets to get 5-6 clients & total 20 mn$ revenue in 3-5 years.

Talent Acquisition
The company hired Sudipta Saha as European head. he has previously worked at CSC, Mindtree.

Disc - I continue to hold, No transactions in last ~4 months

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@rupeshtatiya, @rohitbalakrish_

What are the growth drivers in medium term ?

As per my understanding the growth drivers are as follows ->

  • Turning around of acquisitions
    The company had done some acquisitions in last two years like IBIS (Retail), Rezopia (Travel), Halosys (Mobility). The first two can be thought of as verticals and would directly contribute to top line & bottom line. Halosys is more of capability acquisition and it enhances current products portfolio of company resulting in customer wins and more revenue per customer. It also enables them to have some customers which they could not have acquired in the past.

  • US Economy and Customers
    There can be some decent customer wins for Sonata especially in the area of Retail (Brick and Click, Microsoft Dynamix, IBIS) and also in the area of travel (SAP Hybrids and Rezopia). In these two areas, I believe company has not exploited full potential.

  • Geographical Expansion
    The company has been attending road shows in newer geos and newer verticals e.g. Road shows for Travel in Australia. The results in these newer geos are small and not yet significant. But I feel some of it will consolidate and show up sooner than later.

The main investment point is - there was limited downside to Sonata stock when it was trading around ~140 for a long time. It has also consistently provided dividend yield of 4.5%. If the upside triggers play out and sectoral headwinds recede, there can be handsome re-rating.

Disc - Invested at average price of ~155, No transactions in last ~5 months, This is not a buy/sell recommendation

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Would agree to the points that @rupeshtatiya mentioned. The key to monitor here are the growth rates of the IT services business. Can they consistently do 4-5% QoQ dollar revenue growth , if they can- without compromising on margins, then the business can get re-rated.

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